OTP Capital. View on the current events
Dear investors and depositors of investment and pension funds, which are in the management of OTP Capital. For the sake of effective communication, we start publishing of prompt messages regarding the vision of the current economic situation in the world and Ukraine, as well as the status of assets held in the portfolios of investment and pension funds managed by OTP Capital.
How the coronavirus affected the world economy?
Unfortunately, the global financial market and the Ukrainian market, as part of it, have encountered a sufficiently significant problem called the coronavirus pandemic. Financial markets usually operate on the principle of reflecting the future in the current situation. A key risk of the coronavirus pandemic is that the restrictive measures in most countries of the world are transformed into a significant decline in economic activities. In turn, the economic problems automatically turn into the realm of actual indicators, namely the GDP decline, increase in unemployment, decrease in profits of enterprises, unrecovered loans, decrease in demand, etc. Correspondingly, the financial market, realizing the potential economic problems, immediately responded with a significant decline of all possible asset classes. In particular, the depreciation of shares, commodities, government and corporate bonds, even precious metals, happened. Moreover, the reaction was instant, which had never been observed before.
In Ukraine, these processes occurred under the similar scenario – decline in shares, yield increase of fixed income tools, in particular, government bonds and corporate bonds, as a result, their value decreased, there was a significant fall in the UAH against the USD and the EUR, etc.
How the problem is solved worldwide?
Recession that is a partial and temporary real GDP decline in the world is now seen as a baseline scenario. Which is reflected in current prices of shares, commodities, bonds, etc. However, understanding the problem, the executive bodies and financial regulators launch the massive multi-trillion support packages, by flooding the developed economies with money and liquidity. In such a situation, if the virus is stopped, the world economy will be able to handle the crisis quickly and relatively smoothly. As evidenced, in particular, by the reaction of the US stock market on March 24, 2020, namely, the increase of the major indices by more than 10% per day. The positive trends continued on March 25, 2020 – +4% of the major indices.
How the problem is solved in Ukraine?
The Ukrainian economy belongs to the category of developing countries. Countries of this category are usually pro-cyclical and react adversely on global economic problems. However, in the current conditions of mass support for the world economy, the developing countries are also experiencing a positive effect. That is, Ukraine is most likely not to have a direct positive impact from incentives in the developed countries, in particular, due to the renewed demand for the MMC products (mining and metallurgical complex) and other fields of industrial exports. In the agricultural sector, the current situation is relatively stable, in particular, as of March 25, 2020, wheat prices have one of the highest values in the last year. Therefore, the agricultural industry will also support the Ukrainian economy. On the other hand, the key import components, in particular, the energy supplies, are at historically low levels. Such conditions will help to keep the country’s commercial balance sufficiently balanced.
Nevertheless, despite all the market economic processes, the most critically important issue for Ukraine is to receive the IMF assistance, and it is advisable to double the planned amount, which will amount to about USD 10 billion. At the eve of the pandemic, the fulfilment of IMF conditions was of political plane, as the main criterion was the Law of Ukraine “On the Non-Return of Liquidated Banks to the Former Owners”, which made it impossible for PrivatBank denationalization risk to occur. At present, given the very difficult economic situation, the political constraints are being side-lined and it is likely that this law will be voted on March 26-28, 2020. The law will allow getting the IMF assistance, which will stabilize the country’s economic situation, fulfil its current external obligations, help to accumulate reserves and, most importantly, form the basis for recovery from the current economic crisis.
OTP Capital will keep track of all economic events.
At present, the key objective is the voting for a law necessary for getting assistance from the IMF on March 26-28, 2020.
Stay tuned for more comments on the current events on our site.
For more information on the current state of assets held in OTP Capital’s investment and pension funds portfolios, read the Investment Manager’s comments via the links.
