Bonds: Debt rollover ratio remains decent YTD

The Ministry of Finance refinanced 90% of debt redemptions in February in all currencies; however, the rollover ratio YTD exceeds 100%.At last week’s primary auction, the MoF raised UAH11bn (US$287m) without changes in interest rates. This was one of the largest weekly borrowings this year. Last week’s proceeds were split almost equally between local and hard currencies. See details in the auction review.Thanks to large volumes of UAH borrowings in February, the total monthly refinancing level in all currencies was 90%. YTD, the total rollover rate stood at 119%, including 88% in US dollars and 93% in euros. Borrowings continue to exceed repayments only in local currency. The rollover ratio was 138% in February and 190% YTD.Due to significant redemptions of USD-denominated securities last week, the volume of domestic bonds outstanding slid in February by 0.2%. Except for banks, portfolios of all bondholder groups declined.During March, the Ministry must repay UAH18bn (approximately US$467m) of UAH debt (including UAH16bn next week and UAH2bn at the end of the month) and US$430m in FX-denominated bills (in two weeks). So, in preparation for significant repayments, the MoF has added a new US dollar issue to today’s offering and will, thus, offer USD-denominated bills three times in March.

ICU view: The MoF has already refinanced all scheduled for January and February domestic debt redemptions, largely thanks to UAH notes. It will likely try to step up FX borrowings in view of upcoming sizeable redemptions in March to ensure the rollover for FX instruments is at least 100%. April’s schedule is very light on redemptions with only UAH2.5bn scheduled, so the Ministry will be accumulating liquidity for May repayments when UAH40bn (about US$1bn) and EUR277m are to be redeemed.

Bonds: Investors wait for signals from MoF

Ukrainian Eurobond prices rose significantly last week in anticipation of the start of debt restructuring negotiations.Last week, Ukrainian Eurobond prices rose by an average of 9.6%. The prices shifted to 26‒32 cents per dollar, and the price range for Ukrainian Eurobonds with different maturities narrowed to 11.3%. The VRI’s price increased by 4% to 47 cents per dollar of notional value. The EMBI index increased by 0.2% last week.

ICU view: Last week, investors were actively discussing rumours of an imminent start to negotiations on restructuring Eurobonds. Despite lack of new material information about possible restructuring terms, bondholders were broadly optimistic and took the rare signals from the government as a sign that a full-fledged restructuring rather than extension of a standstill agreement looms.

FX: FX market balance improves again

The demand for hard currency decreased last week, which allowed the NBU to reduce its interventions and strengthen the official hryvnia exchange rate.In the interbank FX market, the purchase of foreign currency by bank clients (legal entities) decreased by 20% last week. At the same time, hard currency sales increased by 13%, implying net sale of foreign currency of US$38m. The official hryvnia exchange rate strengthened by 0.5% last week to UAH38.16/US$ for yesterday.Net purchases of hard currency in the retail FX market decreased to US$203m. The cash exchange rate in systemically important banks strengthened by 0.2% to UAH38.0‒38.6/US$.The overall improvement in the FX market balance allowed the NBU to reduce its FX sale interventions to US$321m.

ICU view: With no significant demand for hard currency from government entities for import contracts, the FX market balance improved. Despite the relatively favourable situation and below-average deficit in the market, the NBU gives little room to the hryvnia to strengthen, likely indicating its strong preference for gradual hryvnia depreciation in the mid-term.

Economics: Financial account significantly negative on lack of foreign aid

In January, Ukraine’s financial account turned significantly negative while the current account balance improved markedly.The current-account deficit improved to US$0.5bn in January thanks to a better balance of trade in goods. Export of goods was up 12% YoY while imports surprisingly declined 1%. The balance of trade in services was little changed in December, but improved substantially vs January 2023, which reflects a decline in expenditures of Ukrainian refugees abroad. Migrant incomes fell 17% YoY, but still offset more than a third of the trade deficit. Transfers to government were insignificant as Ukraine did not receive any new grant funding from the US.The financial account was negative at US$1.4bn, the largest deficit since September 2022. FX cash outflows from banks (the largest channel of private capital flight) increased in January, while flows through other channels remained little changed. Unlike in previous months, Ukraine did not receive any sizeable loans in January 2024, as Ukraine’s allies were finalizing formalities to unlock funding in the following months.

ICU view: January balance-of-payments data are not indicative of the trends through end-2024. We expect the current account deficit to widen in money terms in subsequent months on the growing shortfall of external trade. Meanwhile, the financial account is expected to turn positive as of March as Ukraine is expected to receive the first tranche of the EU loan. We project Ukraine’s 2024 current-account deficit at 5.2% of GDP, little changed vs 2023. At the same time, it is going to be fully covered by the financial account surplus. We, thus, expect relatively stable NBU reserves and exchange rate during 2024.

Economics: Ukraine’s public debt little changed in January

Ukraine’s public debt was down 0.3% in US$ terms in January to US$144.9bn.The government raised only nominal volume of new debt from its foreign partners in January and also marginally increased local debt.

ICU view: January statistics are not indicative of a further trend through end-2024. While the public debt is also likely to stay nearly flat in February, it will start growing from March as Ukraine is scheduled to receive sizeable loans from the EU and other international partners. We expect an end-2024 debt-to-GDP level close to 90%, up from about 83‒84% at end-2023.

Read the full report here.