ICU Weekly Insight, Jan. 18, 2022
Bonds: Ukrainian Eurobond market in seesaw due to geopolitical tension
Statements made by Russian officials after talks with the US and NATO have led to a significant increase in fear of a possible Russian invasion of Ukraine and worsened Ukraine’s credit risk assessments by local and international investors. All this was happening on the back of the expected tightening of the Fed’s liquidity support. This led to a sell-off of Ukrainian Eurobonds, which is likely to continue this week.
Thus, the YTMs of bonds maturing in September 2022 reached 20%, and on instruments maturing in the next three years, YTMs increased to 14-15%. For longer bonds, the YTM was lower at 11-12%. Ukrainian CDS exceeded 1’000bp for up to three years, although at the end of last year it was 550-590bp.
ICU view: The reaction of the markets to the news from Russia was quick and very negative, and now supported by a high level of uncertainty. Therefore, the situation in the Eurobond market will remain difficult, and investors are likely to continue to reduce exposure to Ukraine.
FX: The hryvnia is weakening
Last week, the hryvnia weakened again, mostly under the influence of psychological factors caused by statements from Russian officials.
The weakening of the hryvnia lasted from the beginning of the week, but was quite moderate. However, after the news on Thursday, weakening accelerated and by the end of the week, the hryvnia exchange rate fell to UAH28.03/US$, losing 2% for the week and 2.7% since the beginning of the year. The NBU’s interventions, which in fact only restrained this weakening, did not help either. Excluding last November’s large interventions, which were caused by Ukrenergo Eurobonds issue and debt repayments to green energy producers, the last week’s US$331m of hard currency sold from reserves is the largest intervention since July 2020. The NBU sold about US$103mn last Wednesday, the day after foreigners’ large sell-off of local-currency paper for almost a billion hryvnias, and last Friday, another US$100m was sold. There were interventions on Tuesday and Thursday too, in amount of US$35m and US$85m respectively.
In general, the market remains dominated by demand for hard currency, which is created mainly by importers of energy resources and foreign investors in local-currency debt. At the same time, the supply of hard currency remains quite small compared with previous months. This causes a fairly large and constant excess in demand from bank customers, which has to be satisfied by the NBU and banks.
ICU view: This week FX market will remain under the impact for psychological factors, caused by news about Russian aggression, with addition of pressure from increased demand for hard currency. Under such conditions, the hryvnia exchange rate will fluctuate within the range of UAH28-28.5/US$.
RESEARCH TEAM
Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
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