Ukraine sovereign debt: Results of 1H12, prospects for 2H12

In this report, we provide our updated view on sovereign debt, taking into account the results in 1H12, all the borrowings of which were made since the beginning of the year; analyse debt repayments and their impact on state debt; and explain the main changes in the policies of the regulators, and their effect on the market.

Only domestic financing was attracted in 1H12. The MoF lost its chance to issue Eurobonds this year for the VTB repayment or repackaging, and as a result, half of the loan was extended until June, 2014, and the other half was repaid and partially refinanced using USD-denominated domestic bonds. In 1H12, the MoF used local sources to finance the state budget and refinance debt repayments. A total of UAH43.32bn of budget proceeds was received from the domestic bond market, including UAH20.39bn from FX-denominated bonds. The extension of half of the VTB loan amounting to US$1.0bn cannot really be classified as a new borrowing.

Domestic sovereign debtholders. The non-residents\' share in the local market significantly decreased over the second quarter, as their local-currency bond portfolio continued to decline, falling nearly four-fold from the beginning of last year till the end of last month. At the same time, other bondholders\' groups significantly increased their portfolios during the last 18-month period, especially the NBU and local banks. This year, the largest portfolio increase was in the banks\' group.

Key issues MoF is facing. The MoF has to repay significant volumes in debt principal and interest repayments by the end of this year: repayments have to be made on domestic debt principal and interest amounting to UAH24.80bn, as well as external debt repayments of UAH8.81bn. At the same time, domestic debt interest and principal repayments of UAH26.41bn need to be made during the 1H12, plus UAH15.44bn in external debt repayments (including only half of the VTB loan).

Banking sector liquidity: The main problem for domestic financing. This year, we saw significantly larger support of liquidity from the NBU, but at the same time, at the end of May, we encountered a new problem with liquidity, which was caused by volatility in the FX market; as a result, the decline in liquidity continued in June, and when the MoF is faced with large debt repayments in 2H12, these repayments will not be able to be made without the NBU\'s support.
Read full comment in the attachment (17 pages, PDF file 863KB)