ICU Bond Market Insight: Feb. 14, 2022
Last week, temporary improvement in information flow regarding a possible Russian invasion of Ukraine had a positive impact on investors’ sentiment towards UAH-denominated debt.
Consequently, they reduced the pace of bond sales. While in January and early February, foreigners reduced portfolios by UAH2-3bn per week, last week, their portfolios were reduced by a mere UAH0.4bn.
The slowdown in the withdrawal of funds from local-currency assets also affected secondary-market activity. Borrowing in the primary market slightly improved, although this was not due to higher demand from foreign investors. Nonetheless, the amount of borrowings rose slightly because of demand for three-month bills, which came to UAH2.1bn last week.
High inflation in the United States, new steps by Russia to increase tensions near the Ukrainian border, and a fruitless meeting in the Normandy format partially worsened the expectations of investors in Ukrainian Eurobonds.
In the first half of last week, the hryvnia exchange rate appreciated to UAH27.92/US$, but last Thursday, it came under pressure from new factors, moving back to above UAH28/US$.
However, overall, the hryvnia strengthened by 0.2% for the week.
Consumer prices increased considerably by 1.3% MoM in January, but annual inflation stayed unchanged at 10.0%.
Meanwhile, core CPI decelerated in a surprise move to 7.6% YoY.
Inflation remains driven by food, which makes up 41% of the consumer basket, as prices rose 2.6% MoM and 14.5% YoY.
Another material contributor was transportation (9.3% of the consumer basket) where prices increased 11.4% YoY.
Utility tariffs increased only marginally, by 4.3% YoY, despite surging energy costs due to government-set caps on gas and electricity prices. Growth in industrial producer prices remains robustly strong; they were up 69.1% YoY in January led by energy sector prices (+196% YoY).
We remain of the view that if geopolitical tensions do not fuel the hryvnia’s weakening, inflationary pressures will gradually fade through end-2022.
The key risk factor to Ukraine’s CPI remains the expected revision of prices for gas and electricity for households that the government has committed to do starting from May.
RESEARCH TEAM: Taras Kotovych, Alexander Martynenko, Vitaliy Vavryshchuk
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