Kiev sees a violent escalation
For almost two months, there have been protests on the central streets of Ukraine’s capital Kiev and in western towns following President Viktor Yanukovich’s refusal to sign a free trade agreement with the EU. Recently, the downtown saw a violent escalation, as severe clashes started among opposition supporters and policemen. Several people died and hundreds have been injured including many policemen. According to some media reports, the protesters represent a marginal group and opposition leaders support peaceful demonstrations. The president has stated that he is ready to meet opposition leaders to calm down the protests. However, there are also reports about civilians on the streets of Kiev who are suspected to be government-sponsored to act against participants in the protests.
Meanwhile, US authorities have introduced sanctions on Ukraine, ‘annulling visas for several Ukrainian citizens’. The EU has also declared that there may be possible consequences for its relationship with Ukraine if the situation does not stabilise’. At the same time, Russian authorities are urging the Ukrainian government and opposition to meet for talks. The Russian Duma urged ‘western political circles to stop contributing to further escalation of conflict’.
From an economic point of view, Ukraine remains safe, as Russia is providing USD15bn in 2014-15 regardless of the current political escalation. The sovereign debt curve has become steeper due to the recent events, with yields jumping to mid-December 2013 levels. However, we see debt serving risks remaining very low. There has been a sell-off in the Ukrainian hryvnia, which has lost 2% year-to-date against the US dollar. The political conflict is still open and radical moves are very possible from both sides raising the hryvnia and yield volatility.
Sell-off in rand puts pressure on the SARB
Next week’s Monetary Policy Committee setting meeting in South African is likely to unnerve the markets, as the outcome is highly uncertain. Even though consensus broadly expects the South African central bank (SARB) to stay on hold, keeping the key policy rate unchanged at 5.00%, the likelihood of the SARB delivering a rate hike is quite high. This is mainly due to the continued sell-off of the rand, which has clearly put upward pressure on inflation. At the MPC meeting in November 2013, the SARB was surprisingly hawkish and the rate hike was discussed but the MPC found the timing impropriate. Given that the pressure on inflation from the weak currency has intensified as the rand has remained under strong selling pressure since, we cannot rule out an emergency rate hike next week. However, a rate hike next week is not our main scenario, although we do expect a hawkish statement from the central bank. This could provide some minor short-lived support to the rand.
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