Foreign investors cut their portfolios of local-currency bonds after last Wednesday’s (May 11) redemption for the first time since Russia’s full-scale invasion of Ukraine.
Last week, almost Hr 18bn ($0.6bn) of local-currency bonds were redeemed and, as a result, foreigners’ portfolios of UAH-denominated bills declined for the first time since 24 February. Total local-currency bonds outstanding decreased by Hr 13bn (S$0.4bn), of which Hr 2bn ($68m) is a decline in the portfolios of foreign investors.
The offering of new 1.5-year paper attracted very limited interest on May 10. According to the primary auction result, the sum of Hr 4.7bn (S$159m) was raised for the state budget, of which just Hr 87m (S$3m) was via new paper. More details in the auction review.
ICU view: The NBU has only allowed the use of funds from principal and interest repayments of local-currency bonds for hard currency purchases beginning in April of next year (see comment below). Thus, foreigners are likely to gradually convert last week’s debt repayments into new bills. We expect they will only show interest in securities maturing in early 2Q23 and will be reluctant to invest in debt with longer tenure. Total investment by foreigners into Ukrainian domestic bonds stood at Hr 2.4bn (equivalent to almost S$2.5bn) as of May 13, 2022, down about Hr 2.4bn ($83m) from 24 February, the day when Russia’s invasion of Ukraine started.
Bonds: Eurobond prices rise slightly
The price of Ukrainian Eurobonds rose during most of the last week, but declined moderately at the end of the week, still retaining some of the gains.
For most of last week, prices on Eurobonds were rising and gains reached as much as 10% for some of them. However, by the end of the week, the trend had reversed, and WoW gains are 4-9%. The price of securities with maturity this September increased the most, adding 5 cents per dollar to reach almost 64 cents.
Other Eurobonds rose mostly by two cents to 35-44 cents per dollar. Along with Eurobonds, the price of VRIs rose by almost two cents to almost 33 cents per dollar.
Last week, the US House of Representatives passed a bill to seek immediate bilateral, multilateral, and commercial debt-service payment relief for Ukraine. The Senate will vote on the draft bill.
The bill consists of three parts. One relates to instructing US representatives in international financial institutions to take steps to immediately suspend all debt service payments owed to the institutions by Ukraine. The second part proposes steps to ease debt payments on all multilateral and commercial debt so that it may be applied to Ukrainian Eurobonds. The third includes an increase of concessional financial assistance for Ukraine.
ICU view: Although the bill passed by the US House of Representatives is highly beneficial for Ukraine, it has worried investors. They fear that international financial institutions will not only take steps to soften Ukraine’s debt burden, but will, along with the US, encourage private creditors to do the same. Therefore, in the future, investors in Eurobonds will closely monitor messages from international financial institutions and Western governments on the approach they use to ease Ukraine’s debt burden.
FX: NBU allows repatriation of UAH bond proceeds
The NBU amended its FX regulations last week, so that foreign investors would be able to repatriate their investments without any limitations into local UAH-denominated bonds that mature after April 1, 2023.The NBU imposed severe FX capital controls from when Russia invaded Ukraine on February 24, including a ban on buying hard currency with proceeds from local UAH bond redemptions and related coupons. The earlier version of the document did not provide any indication about when this ban would be lifted.
ICU view: The news is positive as it provides more clarity about how the NBU intends to gradually liberalize the FX market and lift its tough FX restrictions. With new information in, non-residents who already have UAH bonds in their portfolios or keep cash in Ukrainian banks can now adjust their investment approaches. The NBU’s decision may also encourage new inflows of non-resident money into local bonds in the future when the macro picture becomes more favourable. We believe that the indicated timeline for lifting FX restrictions on UAH bonds is fully credible. Ukraine is in a good position to properly address its major economic challenges over the one-year horizon thanks to generous financial support from its allies.
Economics: Inflation keeps accelerating in April
Annual inflation increased further significantly to 16.4% YoY in April from 13.7% in March. Food prices rose 4.2% MoM and 23.1% YoY, and remain the key contributor to the high consumer inflation. Transportation was the second fastest-growing component of the CPI basket in terms of prices (+18.2%) on the back of surging fuel costs. Prices for clothes remain 6% lower than in last year’s April Core CPI, an index that better captures fundamental inflationary pressures, also accelerated considerably to 13.0% YoY from 10.5% YoY in March.
ICU view: Ukraine’s inflation remains to be shaped by substantial supply-side constraints and surging transportation costs. An additional pro-inflationary factor in play is that of the growing cost of imports, despite the fact that the official UAH/USD exchange rate has remained unchanged since the beginning of the war. We expect inflationary pressures to stay high over the next 12-18 months and we maintain our projection of CPI reaching the 25-30% range in autumn.
RESEARCH TEAM: Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
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