Bonds: NBU increases purchases of military bonds
On Wednesday, April 27, the National Bank of Ukraine bought another Hr 10bn worth of military bonds to support the state budget during wartime.
Last week, the NBU purchased another Hr 10bn ($0.3bn) of military bonds, with total purchases reaching Hr 50bn ($1.7bn) in April and Hr 70bn ($2.4bn) since the russian invasion. The National Bank said this was a necessary step given the significant defence, humanitarian, and social needs.
At the same time, the NBU stressed that such support could not be the main source of funding for government expenditures. It also added that the government should increase market borrowing through primary auctions, including borrowing from the banking system.
The Ministry of Finance raised Hr 13bn ($0.4bn) through the primary auction last week (more details in the auction review) and refinanced a large part of the repayments it made on April 27. Since debt rollover last week was not full, and given the high liquidity in the banking system, the NBU believes that banks have the capacity to increase their debt portfolios significantly.
Total banking-system liquidity has long been close to Hr 200bn ($6.8bn). In late March and early April, it fell to Hr 186bn ($6.3bn) due to tax payments, but just a few days later, it exceeded Hr 200bn ($6.8bn) and then Hr 230bn ($7.8bn) since the end of the third week of April. As of the morning of May 2, the total amount of liquidity was Hr 223bn (S$7.6bn), including Hr 54.9bn ($1.9bn) in the correspondent accounts of banks with the NBU and Hr 168.1bn ($5.7bn) invested in the NBU’s ON CDs.
ICU view: Currently, the banking system has a significant stock of liquidity. Last week, it was increased thanks to budget expenditures and less than full rollover of maturing debt. However, the ability of banks to lend money to the government is likely limited by the term structure of liquidity. Also, the making of new investment in government bonds is likely constrained by limits imposed by parent banking institutions (for banks with foreign capital) or risk management. At the same time, given the stability of the funding base, banks are likely ready to increase investments in military bonds in the coming months to ensure full rollover of hryvnia debt in 2022.
Bonds: Fall in Eurobond prices slows
After a drop in Eurobond prices of up to 10% in previous weeks, prices slid by only 2-4% last week.
The prices of bonds maturing in 2024 decreased by almost 4%, or by 1.5 cents. For remaining Eurobonds, prices fell by an average 2.7% or about one cent. In general, prices are still somewhat above the minimums of 21-31 cents that were seen on March 7, 2022
ICU view: The attention of investors remains focused on news from battlefields and Ukraine’s ongoing negotiations for military and financial support with international partners. The key relevant events last week were a large-scale defence meeting in Ramstein and on Thursday, April 28, the adoption in the United States of a lend-lease law for Ukraine. In addition, US President Joe Biden announced plans to increase war-related aid.
At the same time, it is too early to talk about a fundamental change in the situation on the front. Also, there is still no clear information on the volume, terms, and timing of large-scale financial assistance to Ukraine from Western governments and international financial organizations. The volume of loans received by Ukraine in April decreased significantly compared with March. Therefore, foreign investors still do not have enough positive signals that would improve their assessment of the fair value of Ukrainian Eurobonds.
Economics: Ukraine’s public debt inches down YTD
In March, Ukraine’s public debt increased by 4% MoM, but still declined 1% YTD to an equivalent of US$96.8bn.
The growth in public debt in March was primarily driven by external borrowings. Government raised more than $3bn in new loans in March from Western governments and IFIs while facing much smaller redemptions. Domestic debt declined by 7.8% during 1Q to an equivalent of $35.9bn. The share of UAH-denominated debt was also down in 1Q by 2pp to 34.8%.
ICU view: Ukraine’s public debt was little changed during 1Q in dollar terms, but it is expected to grow substantially in the coming months as Ukraine is upscaling borrowings to cover the huge fiscal shortfall. The end-March debt of $96.8bn implies debt-to-GDP ratio of 49% based on 2021 GDP. However, the expected significant decline in Ukraine’s nominal GDP combined with heavy new borrowings may push the debt-to-GDP ratio close to 100% by the end of 2022. This ratio can hardly be considered comfortable by Ukraine’s creditors.
Economics: Balance-of-payments data sent mixed signals in March
NBU reported balance-of-payments data for March, the first full calendar month of war, which sheds much light on how the economy adjusted to significant economic and social disruptions.
The most prominent observation was a significant decline in the volume of trade in goods —exports declined 52% YoY in March while the downward adjustment in imports was even more significant at 65%. This implies the trade-in-goods balance turned positive in March at $0.3bn. Trade-in-services balance, which is usually in hefty surplus, turned negative in March on an upsurge in day-to-day expenditures of Ukrainian refugees abroad. Those were recorded as the import of services to Ukraine. Transfers of Ukrainian migrants from abroad (a component of primary income) declined 24% in March to $0.94bn as many migrants likely preferred to delay transfer of money to Ukraine to better times. Ukraine also saw a significant increase in private sector transfers (an element of secondary income) on an upsurge in humanitarian aid. All in all, Ukraine’s current account (C/A) turned positive at $1.35bn in March and $2.5bn in 1Q22, which is an outstanding result.
However, the C/A statistics should be interpreted with a great deal of caution. The accuracy of data is significantly lower than in normal times, especially data on trade flows. For example, the official data may understate the volume of import of goods. An abrupt upsurge ($3.2bn) in trade credit and advance payments in March may indicate that either significant amounts of imports came unnoticed or imports will increase significantly in the coming months.
On the financial account side, outflows stood at $1.4bn in March ($2.5bn in 1Q22). While Ukraine saw significant inflows of debt into the state sector at $1.9bn as its Western partners provided generous support to the state budget, the private sector saw significant outflows. The key components of private sector outflows were 1) an increase in export-related trade credit and advance payments for imports, and 2) withdrawal of FX cash from banks, both from FX deposits and via electronic cards linked to hryvnia accounts.
Overall, while the C/A surplus and F/A deficit nearly offset each other, NBU reserves still increased 2% MoM thanks to net IMF loans of $0.7bn.
ICU view: March BoP data shows dramatic adjustments that happened across all BoP lines within the first month of the war. At the same time, March data is very unlikely to be indicative for the upcoming quarters and full 2022. We expect that the trade-in-goods balance will deteriorate significantly in the coming months as imports recover more strongly than exports following the initial war shock. We, thus, expect the C/A balance will slip into the negative territory quite soon. Should this happen, the NBU may be forced to reconsider its commitment to a fixed exchange rate it undertook since the start of the war. The C/A gap is still expected to be largely covered by inflows via the financial account as promises made by Western allies to lend to the Ukrainian government seems credible. We, thus, don’t expect a significant decline in NBU reserves through end-2022.
RESEARCH TEAM: Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
Complete report at https://icu.ua/en
