Bonds: Market for military bonds becoming more active
At the end of April, the Ministry of Finance borrowed almost Hr 13bn ($0.4bn) and another Hr 7bn ($0.2bn) last week. We anticipate that tomorrow, May 10, the volume of new placements may also be significant.
At the end of April, the government redeemed Hr 18.6bn ($0.6bn) of bills, part of which had been placed after the start of the war. However, the government borrowed only Hr 13bn ($0.4bn) immediately after the redemption. Last week, an additional Hr 5.6bn ($190m) and $50m were borrowed (more details in the auction review), which is Hr 4.5bn ($150m) more than the amount of the coupon payment on Hr bonds last week.
A total of Hr 66bn ($2.2bn) has been raised in hryvnia-denominated paper since the beginning of the year, which refinanced the vast majority of Hr 78bn ($2.6bn) of debt redemptions. However, refinancing of FX-denominated debt remains low; $641m and EUR 203m have not been rolled over.
Activity on the secondary market was strong. Last week, the volume of transactions with UAH bills exceeded Hr 8.2bn ($0.3bn), and the number of deals increased to more than 38,000. This is significantly more than in the last week of April, when 4,500 transactions for a total of just Hr 1.3bn ($44m) were recorded.
Overall, last week, banks increased their portfolios of government bonds by Hr 5.6bn ($190m) and other domestic investors by Hr 1.4bn ($47m): individuals’ portfolios grew by Hr 1.0bn ($34m) and non-banking institutions’ by Hr 0.4bn ($13m).
ICU view: More and more banks are making it easier for individuals to buy military bonds. This was most likely the main reason for last week’s eight-fold increase in the number of deals on the secondary market. Such deals could be small, with several bonds purchased by each client, which, ultimately, significantly increased the total volume of transactions on the secondary market.
We expect large volumes of both placements in the primary auction and trading on the secondary market this week. The Ministry of Finance has to redeem Hr 14bn ($0.5bn) worth of bonds, and most of these funds can be reinvested in new bills. And given the launch of new paper maturing in October 2023, investors will have the opportunity to further diversify investments by maturity.
Bonds: Eurobond prices halt decline
Over the past week, prices for Ukrainian Eurobonds stabilized and even marginally increased.
The Eurobond market did not receive any material news about progress in the war nor about the support of Ukraine from the international community.
However, during the week, the prices of Eurobonds even increased by 3-5%. Securities maturing this year rose the most, by 2.5 cents per dollar to 58 cents. Other Eurobonds in US dollars rose by 1-2 cents. The price of VRIs rose to 32 cents on Friday after trading at less than 30 cents for a long time.
At the end of last week, the Minister of Finance reiterated that he did not see the need for restructuring Eurobonds by Ukraine. He also stated that current prices of both VRIs and Eurobonds are favourable for buy-backs. Thus, the Ministry of Finance does not rule out such a possibility, but at the moment, it does not seem appropriate. In particular, there is no free liquidity for buy-backs, and, moreover, such operations will raise questions from partners about how their financial support is being used.
ICU view: Although the donors’ conference in Poland signaled another US$6.5bn of aid to Ukraine, the details about the timing and terms of such aid are currently unknown. Therefore, investors did not treat this positive news as material. Statements by the Minister of Finance are, in fact, a repetition of his earlier messages about the importance of servicing the debt on time and in full despite the difficult economic situation. However, despite these messages being positive, they did not provide the market with new information. In general, the recent increase in Eurobond prices may be situational. Without significant positive news, it is unlikely that a steady trend for Eurobond appreciation will emerge.
Economics: NBU reserves fell 4% in April on heavy interventions
In April, NBU gross international reserves declined by $1.2bn, or 4.1%, to $26.9bn.
The decline was primarily driven by significant interventions as the NBU had to sell $2.2bn in April to keep the FX market in balance against the backdrop of a fixed Hr/$ exchange rate. NBU reserves were supported by $1.9bn in new borrowings and grants, including $750m from the World Bank, EUR300m from France, $235m from Canada, and EUR120m from the EU. At the same time, the government and the NBU spent $0.7bn on servicing their FX debt.
ICU view: The volume of FX interventions by the NBU remains robustly high. The NBU has also been selling FX in May and sold almost $0.6bn on the first day of the month. The risks are high that interventions may need to be increased in the future as the import of goods will likely recover significantly faster than exports. In that case, the NBU may be forced to reconsider its commitment to a fixed exchange rate and let the hryvnia gradually depreciate. At the same time, we don’t expect a significant decline in NBU reserves throughout 2022, as they will be supported by an inflow of financial assistance from Ukraine’s allies.
RESEARCH TEAM; Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
Complete report at https://icu.ua/en
