ICU Weekly Insight: June 20, 2022: Debt Refinancing Falling

Bonds: Refinancing of local debt is falling

Last week, the Ministry of Finance repaid Hr 18.2bn ($0.62bn) in Hryvnia-denominated bonds, but borrowed only Hr 5.5bn ($0.19bn) for the state budget, of which just Hr 3.8bn ($0.13bn) was in local currency. As a result, the total refinancing gap in local currency increased to Hr 35bn ($1.2bn) YTD.

Since the beginning of the full-scale Russian invasion, placement of local currency bills has improved due to the patriotism of domestic investors.

In March and April, borrowings in local currency exceeded redemptions.

But since early May, inflationary expectations worsened and expectations emerged that bond yields could go up.

Such expectations were reinforced after the National Bank of Ukraine raised the key policy rate. As a result, refinancing of debt has begun to face more challenges. In the first two weeks of June, new placements in hryvnia fell short of redemptions by Hr12.5bn ($0.42bn), and the cumulative YTD gap increased to Hr35bn ($1.2bn).

At the first auction in June, the Ministry of Finance borrowed only Hr0.8bn ($27m) via military bills; and the volume fell further to only Hr0.3bn ($11m) last week.

The parallel offering of non-military bonds attracted limited demand as well. More details in the auction review. On the secondary market, the volume of military bond trading increased, but remained below the average weekly volume since the beginning of the war.

For the first time in two months, the bond portfolio of individuals decreased by Hr0.4bn ($14m), and the portfolios of foreign investors also continued to decline. While individuals continued to buy bills, albeit in small amounts, foreigners have not been in a hurry to purchase bonds at all.

ICU view: The Ministry of Finance insists the rates on military bonds should remain unchanged even after the hike in the NBU key policy rate. This is despite the fact that the MoF agreed to pay a floating rate on military bills issued for the NBU.

Therefore, banks and other private investors expect that the Ministry of Finance will also be forced to offer a higher rate on bonds sold to the market. At this point, they are not ready to buy significant amounts of military bonds. This week, the demand is unlikely to increase significantly.

Bonds: Eurobond price decline continues

Ukrainian Eurobonds were under general market pressure last week due to rising yields of the US risk-free securities and wider spreads for emerging markets. This was caused by persistently high global inflation and related decisive actions of the key central banks to tighten their monetary policies.

Uncertainty about the prospects for ending the war and Ukraine’s ability to repay foreign debt in the medium term also restrained investor appetite for Ukraine’s debt. Over the past week, all Eurobonds maturing in 2023‒2033 lost an average of three cents and fell to 32‒40.

Only the price of Eurobonds redeemable in two months fell by one cent. VRIs fell by three cents to less than 34 cents.

ICU view: A huge budget deficit and continuing extraordinary financing needs has brought the topic of restructuring Ukraine’s Eurobonds into the spotlight. The Minister of Finance has repeatedly claimed that Ukraine will keep honoring its debt obligations, including Eurobond payments, in time and in full.

Indeed, restructuring doesn’t look imminent given generous financial aid that Ukraine is receiving from its allies. Meanwhile, the perception of investors remains cautious, as indicated by Eurobond (maturing in 2023 and beyond) prices of 32-40 cents per dollar.

The 2022 Eurobond price is significantly higher at 69 cents, implying the investors believe a full and timely redemption is likely. The balance of pros and cons is not static and may change depending on how long the war continues.

Eurobond prices are unlikely to recover significantly and ample volatility will persist until there is clarity as to when Russia’s war against Ukraine might end.

Read more about the prospects of Ukrainian Eurobonds in our special report “Eurobonds: Pros and Cons of Restructuring“.

FX: Hryvnia exchange rate volatility low

The hryvnia exchange rate in the cash segment remains relatively stable. The cash exchange rate of hryvnia to the US dollar offered by banks weakened from Hr34.5‒35.5/$ to Hr34.9‒35.7/$, but the spread tightened. The exchange rate for card transactions remained almost unchanged at Hr30‒33/$.

Demand for hard currency on the interbank market increased significantly, forcing the NBU to increase the volume of interventions by more than a third to almost $1.1bn.

ICU view: The cash market continues to fluctuate close to the previous week’s levels, which contributes to narrowing the spread. Therefore, in the absence of significant news, the cash exchange rates may remain close to current levels.

RESEARCH TEAM
Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych

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