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Bonds: debt refinancing conditions are deteriorating
Despite significant purchases of UAH government bonds last week, new purchases remained subdued.
Last Tuesday, the government managed to borrow 3.6 billion UAH ($98.5 million), the highest amount in a month and a half. However, most of the borrowings were made through bonds denominated in foreign currencies, and only UAH 11.8 million ($0.3 million) were raised in local currency. This is the lowest amount this year despite the fact that the Ministry of Finance repaid more than UAH 16 billion ($437 million) of domestic debt last week, including almost UAH 15 billion ( $410 million) of principal.
On foreign currency bonds with six-month maturity, the interest rate increased by 25 bps to 4.25%, while rates on UAH bills remained unchanged. See details in the auction review.
For UAH-denominated bonds, repayments exceeded new borrowing by more than UAH 100 billion ($2.7 billion), as the refinancing rate fell to 52 percent year-to-date. The Ministry of Finance has covered these repayments with funds from the NBU, which has loaned the government UAH 315 billion ($8.6 billion) since the full-scale Russian invasion.
For bills denominated in foreign currencies, the level of refinancing was not much better than for redemptions in local currency. Nearly $1 billion, or 44% of repayments, were not refinanced for USD bonds.
ICU view: The maintenance of low rates by the Ministry of Finance during the primary auctions does not contribute to the construction of significant demand because the rates on the secondary market are much higher. Therefore, in terms of financing the budget deficit, the government is critically dependent on funding from the NBU and international partners.
Bonds: Eurobond prices fall significantly
Ukrainian Eurobond prices fell last week after a large-scale missile attack on Ukrainian civilian infrastructure.
Over the past week, prices have fallen 1-2 cents, or 3-10%, to 17-26 cents. The price of VRIs fell nearly 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 at several major industrial enterprises. Moreover, investors are clearly aware of the risks of possible repeated strikes, which could cause further damage to the Ukrainian economy. Consequently, investors reassessed the value of Ukrainian debt amid cautious global sentiment towards junk debt.
FX: The hryvnia is strengthening
Despite massive missile attacks on infrastructure on Monday, the spot FX market remained relatively calm.
The supply of liquidity in the market has improved, gradually reducing the panic effect and thus reducing excess demand. So, even despite the large-scale missile attacks on Ukraine on Monday, the hryvnia exchange rate at banks and non-bank exchange offices has continued to strengthen since Tuesday.
As a result, the hryvnia exchange rate in the 10 major retail banks strengthened from 40.2-41.0 UAH/USD to 39.9-40.7 UAH/USD.
The interbank market did not seem to react to the missile attacks and required $605 million in NBU interventions, which is almost the same as the previous week.
ICU view: Last week and today have clearly shown that the currency spot market has become much less sensitive to missile strikes on major Ukrainian cities. The new attacks no longer force people to buy currency at any price, helping to reduce exchange rate volatility.
Economy: Inflation accelerates to 24.6% in September
Annual inflation accelerated to 24.6% year-on-year in September, from 23.8% in August. Core CPI hit 20.4% year-on-year.
Price growth continued to accelerate across the board, but food prices remained the main driver of inflation given the large share of food (41%) in the consumption basket. Clothing and footwear prices remained almost flat year-on-year, reflecting the deterioration in people’s purchasing power, while weak growth in utility prices reflects caps on gas prices and electricity imposed by the government during wartime.
ICU view: The accelerating pace of inflation is in line with our projection of CPI reaching 29.5% YoY by the end of 2022. Inflation will peak again near 32% in February before s engage in a decelerating trend in March 2023.
RESEARCH TEAM: Vitaliy Vavryshchuk, Alexander Martynenko, Taras Kotovych
See the full report here.
