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The slack has been taken up by the local banks, but Sleptsova says that local banks are almost tapped out and without the non-residents the OVDP is not a viable sources of funding.
“Ukrainian banks’ holdings of government debt are already close to an internationally established limit of 35% of the deposit base, suggesting that their ability to absorb any further debt is limited,” says Sleptsova.
Indeed, at the weekly auction on November 24 the Ministry of Finance had to hike yields by 125bp to 10.25% to sell c.$200mn of mostly 5-month notes that was only just enough to roll over maturing debt.
However, the government doesn't seemed to have grasped the reality of the situation as the draft 2021 budget assumes that the majority of the gross funding needs will be financed by issuing more OVDPs local currency bonds on the domestic market. The plan is to issue UAH550bn of local debt and UAH86bn of FX bonds as well as UAH43bn form the IMF. Of this issuance UAH440bn is needed to roll over old debt. That leaves a net issuance of UAH280bn, according to Oxford Economics, but local banks have total liquidity of only UAH200bn, so even if they invested all this money into local bonds it is not enough to cover the government’s funding plans.
One option is for the Ministry of Finance to buy back some of its debt from the banks in a quantitative easing (QE) scheme. But currently the NBU is banned from monetising local debt, but the idea is being currency discussed.
Another option is to tap the international capital market with another Eurobond to follow the $2bn bond placed in July. However, again without a functioning IMF deal the cost of borrowing will be higher and Sleptsova says that Ukraine wont be able to issue more than $1.5bn-$2bn in 2021 anyway.
The numbers just don't add up. Sleptsova calculated that the government will face a $4bn funding gap in 2021 without the IMF money.
Out of the total planned budget deficit of UAH300bn (about $10bn) for 2020, the government managed to raise only UAH82bn ($3.1bn) in the first nine months of the year, three-quarters from external sources and one-quarter from
15 UKRAINE Country Report December 2020 www.intellinews.com
