The Ukrainian government is making strategic adjustments to its bond offerings, aiming to balance the demands of the domestic market and the need to finance its ongoing operations. The Ministry of Finance (MoF) has reintroduced reserve bonds at primary offerings, while excluding 12-month military bills from the auctions. This move reflects the ministry's efforts to manage the complex landscape of government debt and ensure sufficient funding for its budgetary requirements.
Reshaping the Bond Landscape: Balancing Priorities
Reintroducing Reserve Bonds, Excluding Military Bills
The MoF has reintroduced reserve bonds at primary offerings, which banks can use to cover their mandatory reserves. This decision comes after a three-week period where the ministry did not offer these bonds, leading banks to focus more on military bonds. The increased demand for military bonds has resulted in significant oversubscription, with the MoF borrowing substantial funds. However, this high demand has not translated into price competition, as bids have remained close to the cut-off rates.Reshuffling Bond Maturities
For November, the MoF has made some changes to its bond offerings. It has excluded the 12-month paper and replaced the 1.5 and 2.5-year bills with new bond series. Additionally, the ministry will offer two and three-year reserve bonds, catering to a broader range of investor preferences.Anticipating Demand and Financing Needs
The MoF expects the demand for military bonds to significantly exceed the supply. By offering a combination of two types of bonds, the ministry aims to borrow enough funds to roll over all redemptions and finance other budget needs. This strategy suggests the ministry's efforts to balance the diverse investment preferences and ensure sufficient liquidity to meet its financial obligations.Implications for Small Investors
The exclusion of the 12-month paper may impact small investors, who typically prefer shorter-term maturities. These investors may now turn to the secondary bond market to meet their investment needs, as the primary offerings no longer cater to their preferred maturity profiles.Robust Borrowing and Improved Rollover Rates
In October, the MoF borrowed a record volume of funds, with a significant increase in the rollover rate for UAH-denominated papers. The total rollover ratio for the first 10 months of 2024 reached 152%, indicating the ministry's ability to refinance its maturing debt. The rollover rate for UAH-denominated debt was particularly strong, reaching 187% in October and 181% for the 10-month period.Cautious Approach to FX-Denominated Borrowings
While the MoF has been actively borrowing in the domestic market, it has been more cautious with FX-denominated debt. The rollover ratio for USD-denominated debt was 84% in October, implying a 119% ratio for the 10-month period, down from 136% in the first 9 months. The ministry may choose to step up FX borrowings from the domestic market later if needed, but for now, it appears to be prioritizing UAH-denominated debt.Navigating Currency Fluctuations
The National Bank of Ukraine (NBU) has been actively managing the hryvnia exchange rate, with interventions remaining broadly flat week-over-week. The central bank has allowed for increased fluctuations in the official exchange rate, which reached UAH41.38/US$ last Tuesday, before strengthening towards the end of October.Current Account Dynamics and Reserve Levels
The current account turned negative in September, primarily due to a pause in foreign budgetary grants. This reversal, combined with a net outflow of private capital, led the NBU to spend a significant amount of its reserves to maintain stability in the FX market. Gross international reserves declined by 8% month-over-month to US$38.9 billion.Inflation Outlook and Monetary Policy Adjustments
The NBU has revised its inflation and key rate forecasts for 2025, citing the acceleration of inflation beyond its previous projections. The central bank now expects CPI to reach 9.7% by the end of 2024 and 6.9% by the end of 2025, with a more conservative approach to rate cuts. While the chances of a rate hike in the coming months remain low, the NBU has acknowledged the possibility, reflecting the evolving economic landscape.Overall, the changes in the government bond offerings and the broader macroeconomic dynamics in Ukraine highlight the Ministry of Finance's efforts to navigate the complex financial landscape and ensure the country's fiscal stability. As the situation continues to evolve, the MoF and the NBU will need to remain vigilant and adaptable to address the challenges and seize the opportunities that arise in the Ukrainian bond market.
