Bonds: Ministry of Finance more active borrowing through T-bills
Last week, the Ministry of Finance held the most active auction of the year, and this week’s auction may further improve budget deficit financing.
Until the last week, the largest auction was in June, when the Ministry of Finance was able to borrow more than Hr 19bn with a weighted average maturity of two years, which included large participation from foreign investors. Last week, a new record amount of funds was borrowed at Hr 20.5bn, but with a weighted average maturity of just slightly above one year. Just offering of the Hr-denominated bills with maturities of up to one year, allowed to set a new record high. These bills provided the budget with Hr 8.2bn, while 12-month USD-denominated securities provided additional Hr 8.4bn for the budget. In addition, a further Hr 4bn was raised from bills and notes with maturity of more than one year.
According to NBU statistics, the main investors last week were Ukrainian banks, which bought the vast majority of bonds. In addition, activity in the secondary market intensified, and trading volumes increased to almost Hr 11bn, where Hr 6.3bn was traded in Hr-denominated bonds, including not only bills sold at last week’s auction. Foreigners reduced their portfolios again, probably by selling bonds maturing in 2026, of which Hr 1.5bn traded last week.
ICU view: We expect the auction to be active again today, but we do not think it will set a new record.
Most likely, foreign investors will again ignore the primary market, and investors will not be in a hurry to buy large amounts of new bonds. It is possible that the vast majority of bonds will be purchased by banks, including state-owned banks, which will prefer short-term bills.
FX: Hryvnia keeps FX market in balance
The FX market was mostly self-balanced, with small fluctuations in the hryvnia exchange rate. But this week, volatility may increase due to VAT refunds and importer’s need for hard currency.
In general, the imbalance among bank customers persisted, requiring more hard currency than sellers offered, and this need was covered by banks. In general, market turnover changed insignificantly, but the NBU refrained from selling interventions and instead, bought $10mn in reserves in two days.
As a result, the hryvnia exchange rate remained in the expected range of Hr 27–$27.5 and weakened by 0.1% to Hr 27.27/$ by the end of the week, which was stronger than at the beginning of the year.
ICU view: This week, the hryvnia will be under pressure from lower currency supply from exporters due to VAT refunds that can reach Hr 10bn and due to the Christmas and New Year holidays with low business activity. Therefore, demand will prevail again, but the NBU can meet excess demand using reserves, balancing the market in the same range of Hr 27–27.5/$ by the end of the year. However, in the first few weeks of 2022, the exchange rate may weaken a little more, approximately to Hr 28/US$, although such a movement will be short-lived and caused by the same low business activity due to holidays.
RESEARCH TEAM
Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych, Mykhaylo Demkiv, Dmytro Diachenko, CFA
Complete report available from ICU
ICU Macro Review, 28 Dec. 2021
