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Domestic bond market of Ukraine will be in a “freeze mode” on the eve of parliamentary elections - expert

October 25, 2012
Alexander Vedeneyev, Head of Research, AYA Capital:

We expect the domestic bond market will be in a “freeze mode” on the eve of parliamentary elections. Market’s nervousness will be implied in high interest rates both due to fears of liquidity crisis in case of massive public protests (like in 2004 during Orange revolution) and interpretation of recent statements by the NBU Governor. Namely, following a plenary session at the IMF and WB annual meeting in Tokyo, Mr.Arbuzov said that the NBU planned to implement a more liberal currency regime and that he did not consider the current exchange rate regime fixed. As usual during talks with the IMF and technical missions arriving in Ukraine, we may really see increased volatility in the interbank FX market. The latest such example was in May’12 when the NBU together with FX market “temporary liberalization” played into the hand of liquidity squeeze to smooth over excessive FX demand.
The same situation may be repeated in the nearest days with O/N rates being close to 30% level. Actually, last week the overnight rates reacted significantly to those changes in UAH balances that were comparatively immaterial in the recent weeks. Thus we may say that UAH liquidity could be concentrated in a few banks currently, while the majority of market players are craving for some sources of funding. As a result, decreased UAH liquidity and probably tighter NBU’s control over liquidity-providers will not upgrade the local bond market from its current sluggish status. Thus we expect the yoeld curve to remain on those highs where it is now.
Meanwhile, the MinFin has scheduled the offering of 5-yr and 7-yr UAH-denominated OVGZ on primary auctions on Tuesday. In view of slack money market and upcoming redemption of UAH 0.4 bn this week and UAH 1.7 bn the next week we suppose the placement will be of technical nature again (with possible participation of state banks). MinFin will also keep making efforts in placing retail 2yr USD-denominated OVGZ, which really looks attractive for households given 9.2% coupon rate, embedded “put option” (implemented through Oshadbank) and de jure lowest credit risk compared to any domestic investments in Ukraine. MinFin has already sold USD 47 mn of these bonds and if the sale continues at this pace, the first series have to be sold out by the end of November (given the total scheduled amount of USD 200 mn).