Bonds: More financing is needed for budget
Last week, the government borrowed Hr 23.6bn ($08.bn), including Hr 20bn ($0.7bn) from the NBU. It was the third issue of bonds purchased by the National Bank since the beginning of the war.
Last week, the number of bonds purchased by the National Bank since the beginning of the full-scale russian invasion reached Hr 60bn. The debut issue of bonds for the NBU took place in March, the second, on April 13, but the third issue took place with an interval of only one week. The volume of each of these three issues amounted to Hr 20bn ($0.7bn).
Also, on Tuesday, another primary auction was held by the MoF. Despite large amounts of hryvnia liquidity in the banking system (last week, the total amount of banking-sector liquidity exceeded Hr 230bn ($7.8bn)), HR-denominated securities did not receive much demand. Only Hr 156m was raised for the budget. The vast majority of funds came from FX-denominated bills, almost $82m and EUR33m (Hr 2.4bn and Hr 1.1bn, respectively). See more details in the auction review.
FX-denominated bills are traded actively on the secondary market. While four issues of Hr military bonds saw nearly 2,000 trades, the total amount was less than Hr 300m ($10m). In contrast, there were only 150 trades in FX-denominated papers, but the total value stood at an equivalent of Hr 3bn ($100m). Therefore, hryvnia-denominated bills were likely bought mainly by retail investors, while FX-denominated securities were purchased primarily by banks.
ICU view: It іs very likely that the bulk of liquidity that local banks have is short-term. This likely forced the Ministry of Finance to announce an offering of three-month bills tomorrow in addition to the usual offering of semi-annual and annual securities. Due to the upcoming Hr 17bn redemption of HR-denominated paper on Wednesday (the MoF sold part of this issue after the martial law was enacted), we expect considerable demand for the three-month bills from Ukrainian banks. Therefore, the total amount of borrowing may increase compared with the previous week.
Thanks to the NBU, net budget financing in local currency has increased to Hr 48.5bn ($1.6bn) YTD. However, new Hr placements fall short of redemptions by almost Hr 12bn ($0.4bn) if the NBU’s part is excluded. In addition, the government did not manage to refinance a large part of FX-denominated redemptions – $690m and EUR203m. That is why raising external financing is of particular importance.
Bonds: Eurobond prices continue to decline
The escalation on the front-line has once again worsened investors’ sentiment and has led to a further decline in prices for Ukrainian Eurobonds.
The week started with statements from Ukrainian officials and experts about the beginning of russia’s offensive in Donbas. Also, russia announced the launch of the second stage of the “special operation” and plans to capture the entire south of Ukraine. This series of messages discouraged investors even further. Therefore, Eurobonds fell by another 4-8% back to values of mid-March.
For Eurobonds maturing from 2023 to 2033, prices fell by 2-3 cents to 33-43 cents per dollar, corresponding to 26-88% YTM. For Eurobonds maturing this year, the price also fell by three cents to 58 cents per dollar, giving a 219% YTM.
ICU view: During the Spring Meeting of the World Bank and the IMF, Ukraine’s Minister of Finance reiterated that Ukraine plans to meet all its debt obligations fully and on time. A significant increase in the international assistance package to Ukraine declared last week was yet one more positive signal. Promises of non-refundable aid, including $500m from the United States, have also begun to emerge. At the same time, investors seem to continue to put much heavier weight on information about the course of military actions and the signals about prospects for ending the war. Such signals seem to be quite rare at this point, even though Western countries have announced significant future supplies of heavy weapons to Ukraine.
RESEARCH TEAM: Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
The complete report (6 pages), https://icu.ua/en
