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UkrSibbank Research: Local debt market - Who is price taker?

January 28, 2013

Since the beginning of the year the MinFin has offered a wide range of UAHdenominated bonds. On Tuesday (January 22) the MinFin held its third market OVDP auction this month. Among the UAH debt, the Ministry again offered 9-month, 5- and 7-year bonds, according to the schedule.
Demand for short-end UAH bonds seen risen, yields slid to 14%. While long-term bonds attracted no interest (no bids submitted), 9-month bonds received 15 bids for the total of UAH690mn with the required yield ranging from 17% to 14.3% vs 20%, seen a few weeks earlier.
The MinFin, however, did not accept bids for UAH-OVDP, even at reduced rates, showing the market it sees room for a further decline in rates. We believe such strategy is reasonable for the regulator at the moment as: 1) the MinFin does not face any urgent need of funding this month (the amount of debt falling due in January is just UAH2bn); 2) cooperation between the MinFin and the NBU became even closer this year meaning the latter will support the MinFin’s UAH debt payments. In these circumstances there is no reason for the MinFin to pay high yields for its UAH denominated debt.
Given the record high banking liquidity (which is expected to last for at least two more months), we believe local market players will have to act as price takers. We expect to see more bids for short-term OVDP at yields closer to 14%, rather than 17%.
At the same time, market players are not likely to be ready to reduce their bid yields below 10% in the nearest months, as devaluation expectations are still high. We believe the rates will decline very gradually.

At the same time, MinFin’s funding needs will grow. A pick-up of UAH-OVDP redemption is scheduled for February and March, when the MinFin will have to refinance ca UAH9bn. In addition the regulator should finance a budget deficit of ca UAH2bn per month in 1Q13, in our view. Thus, it may be difficult for the NBU to address all these needs directly (because such a notable emission will put more pressure on the UAH).
The MinFin’s revenues are under pressure due to the weak economic performance.
According to the preliminary data budget revenue was at UAH346bn in 2012 that is UAH25bn lower than planned. The new procedure of corporate tax payments will somehow improve this tax performance (monthly tax prepayment in amount of 1/9 of tax paid during Jan-Sep 2012 of which 1H12 was rather favorable in terms of tax collection).
At the same time, VAT proceeds, which are the main budget source, currently remain weak, in our view.
We thus believe in February MinFin will be more willing to satisfy market bids for OVDP in UAH and its main task now is to push the bid rates down as much as possible. We think that supply and demand will match within the range of 11-14% for UAH-OVDP, subject to duration (3 months - 1 year).