ICU Weekly Insight: 18 Oct. 2022

Bonds: Conditions for debt refinancing deteriorate

Despite significant redemptions of UAH government bonds last week, new purchases remained moderate.

Last Tuesday, the government managed to borrow UAH3.6bn (US$98.5m), the largest amount in a month and a half. However, most of the borrowings were via FX-denominated bills, and only UAH11.8m (US$0.3m) was raised in local currency. This was the lowest amount this year despite the fact that the MoF repaid more than UAH16bn (US$437m) of domestic debt last week, including almost UAH15bn (US$410m) of principal.

On foreign currency bonds with a six-month maturity the interest rate was up 25bp to 4.25%, while rates for UAH bills remain unchanged. See details in the auction review.

For UAH-denominated bonds, repayments exceeded new borrowings by more than UAH100bn (US$2.7bn), with the refinancing rate declining to 52% YTD. The MoF covered these repayments with funds from the NBU, which lent the government UAH315bn (US$8.6bn) since the full-scale russian invasion.

For FX-denominated bills, the level of refinancing was not much better than for local-currency redemptions. Almost US$1bn or 44% of the repayments were not refinanced for bonds in USD.

ICU view: The keeping of low rates by the Ministry of Finance at primary auctions does not contribute to the building of demand in significant amounts because the rates on the secondary market are much higher. Therefore, in terms of financing the budget deficit, the government has critical dependence on financing from the NBU and international partners.

Bonds: Eurobond prices decline significantly

The prices of Ukrainian Eurobonds decreased last week after a large-scale missile attack on Ukrainian civilian infrastructure.

Over the past week, prices decreased by 1-2 cents, or 3-10%, to 17-26 cents. The price of VRIs fell by almost 5%, or 1.5 cents, to less than 27 cents on the dollar of notional value.

ICU view:  Russia’s large-scale missile attack on Ukrainian infrastructure has led to problems in the energy sector, further destruction of physical assets, and a temporary reduction in production of several large industrial enterprises. In addition, investors are clearly aware of the risks of possible repeated strikes, which may cause additional damage to the Ukrainian economy. Therefore, investors reassessed the value of Ukrainian debt against the background of cautious global sentiment towards high-risk debt securities.

FX: The hryvnia is strengthening

Despite the massive missile attacks on infrastructure on Monday, the cash FX market remained relatively calm.

The supply of cash to the market has improved, gradually reducing the effect of panic and thus slashing excess demand. So, even despite the large-scale missile attacks on Ukraine on Monday, the hryvnia exchange rate in banks and non-bank exchange outlets continued to strengthen since Tuesday.

As a result, the hryvnia exchange rate in the 10 leading retail banks strengthened from UAH40.2-41.0/US$ to UAH39.9-40.7/US$.

The interbank market did not seem to react to the missile attacks and required US$605m of NBU interventions, which is almost the same as the previous week.

ICU view: Last week and today clearly showed the FX cash market has become much less sensitive to missile strikes on Ukraine’s large cities. New attacks do not force the population to purchase FX at any price anymore, thus helping reduce exchange rate volatility.

Economics: Inflation accelerates to 24.6% in September

Annual inflation accelerated to 24.6% YoY in September from 23.8% in August. Core CPI reached 20.4% YoY.

Price growth continued to accelerate across the board but food prices remained the key inflation driver given the sizable share of food (41%) in the consumer basket. Prices for clothes and footwear remained nearly flat YoY reflecting the deteriorating purchasing power of the population, while slow growth in utilities’ tariffs reflects caps on gas and electricity prices imposed by the government during the wartime.

ICU view: The pace of inflation acceleration is consistent with our projection of CPI reaching 29.5% YoY by the end of 2022. Inflation will further reach the peak close to 32% in February before it embarks on a decelerating trend in March 2023.

RESEARCH TEAM: Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych

See full report here.