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Opinion
March 22, 2019 www.intellinews.com I Page 23
COMMENT:
Ukraine has to climb a debt mountain
Peter Simon in New York
In a recent report, analysts at Goldman Sachs claimed that participation in Ukrainian local debt auctions could rise between 15% and 30% this year, accounting for an extra $2bn-$6bn in capital. An increasingly stable macroeconomic picture coupled with heavily discounted assets has improved the country’s investment outlook.
And Ukraine needs to go back to the debt market. A new International Monetary Fund (IMF) Stand-By Arrangement was signed in December that should see $2.6bn distributed this year.
That will also unlock another several billion of distributions from other donors like the World Bank and the EU. But debt that was restructured five years ago is about to start coming due and Ukraine needs to refinance a debt mountain in the next two years from currency reserves of only $20bn. Ukraine is going to be heavily dependent on the international capital markets for the foreseeable future.
After the naval clash between Russia and Ukraine in the Kerch Strait in the Sea of Azov in November, investment into Ukraine was expected to dry up. Recently however, reforms by the National Bank of Ukraine (NBU) and the Ministry of Finance have helped to spur fresh inflows. On March 13, Ukraine’s Ministry of Finance issued $350mn of 2028 Eurobonds at 9.75%. This debt offering is expected to be the first among many that offer extremely high returns in a yield starved global environment.
Secondly, and perhaps more importantly, the NBU and Clearstream — an international
Reforms by the National Bank of Ukraine have put the country on a better footing to tap international capital markets this year.
central securities depository (ICSD) based in Luxembourg — signed an agreement on March 13, in what could be a revolutionary event for the market.
Membership of Clearstream will allow foreign investors easily access to Ukraine’s local government bonds, allowing them to trade Ukraine government debt from their desks in London, New York and elsewhere. When the same reform was introduced in Russia in 2012 it transformed the market and lead to tens of billions of dollars flowing into Russian debt.
Clearstream gives international investment managers uninhibited access into Ukrainian debt, thereby increasing liquidity and diversity in domestic high yield securities. Currently, foreign ownership of Ukrainian government bonds stands at a measly 1.3% of the total outstanding debt — which amounts to UAH9.3bn. (Foreign investors share in the Russian debt market
rose to a peak of 34% last year, but has fallen back somewhat since then on sanction woes.) Clearstream’s involvement will bring greater balance to the ownership structure of the bonds.
Despite the clear attractiveness of the Ukrainian market, Ukraine’s macro economic picture, that underpins the bond market, presents a mixed bag. On the positive side, Ukraine has recovered strongly from its near complete economic collapse four years ago. Its central bank governors —Yakiv Smolii and Valeriya Gontareva — have performed their roles diligently and
won praise from the international community.