Bonds: Budget funding still adequate
Last week, the issuance of military bills raised almost UAH 27bn for the budget, partially thanks to the National Bank of Ukraine.
At the primary auction, UAH6.7bn was attracted to the budget through military bills, which were purchased by a large number of participants. Thus, two-month securities were sold with seven bids, and as many as 31 bids were submitted for the one-year paper. This means that there is demand both from primary dealers and their customers. The secondary market also became more active. Since the first issuance of military bills this month, more than 1,400 agreements have been concluded, and, in particular, individuals have purchased military bonds worth almost than UAH 300m.
In addition, to support the budget’s ability to finance critical expenditures, the NBU purchased military bonds for UAH 20bn. This represents direct financing of the budget prompted by the war and the need for additional funds for budget expenditures.
ICU view: This week, the Ministry of Finance will not only offer the same two issues of UAH-denominated military bonds as in the previous two weeks, but also add annual USD-denominated military bills. These instruments may attract even more interest from domestic investors. We expect that the NBU will continue to buy military bonds to support the budget.
Economics: February inflation 10.7% YoY, set to surge in the coming months due to war
CPI accelerated to 10.7% YoY in February from 10.0% in January.
ICU view: February’s number is the last consumer inflation reading that covers the pre-war period. We expect inflation will accelerate considerably in the coming months and may reach 25-30% YoY by the autumn. Price growth will be broad-based, driven by a number of factors. The most critical ones are:
– Depreciation of the hryvnia as significant FX market misbalances will persist in the coming months. The official FX market is now closed, and the official hryvnia exchange rate has been fixed at UAH29.3/USD since the start of the war. However, US dollars are currently offered at 35 hryvnia or more in the cash market (vs. the rate of UAH28.5/$ at the beginning of February). The interbank hryvnia rate will be heading north when the market reopens.
– Severe supply disruptions of key goods and services: Importation of the vast majority of consumer goods is effectively impossible due to FX controls and logistical difficulties. The supplies of locally produced consumer goods are also limited as many businesses paused production and deliveries are impossible due to safety concerns.
– Expected significant reduction in crop harvest and animal-products output as spring sowing campaign may be disrupted due to war.
At the same time, the government is very likely to step in to mitigate inflationary pressures by providing gas below cost to households and businesses and by introducing price caps on certain food products. The authorities have also announced plans to reduce certain indirect taxes.
As a side note, further inflation estimates will be much less accurate and reliable, as many goods and services are no longer supplied in many regions. Also, collection of some price data in the field will be impossible due to safety reasons for Ukrstat personnel. Furthermore, we expect a major change in consumer-basket composition as household expenditures are being shifted to goods that are necessities. This implies the pre-war consumer basket used to track CPI will be largely irrelevant.
RESEARCH TEAM: Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
Complete report available at https://icu.ua/en
