OFZ: Expecting foreign demand in 2021

RUSSIA ECONOMICS - In Brief 23 Dec 2020 by Alexander Kudrin

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Today the Finance Ministry conducted the last OFZ primary auction in 2020. Significant FX market volatility and the quickly setting holiday mood influenced the government’s decision to offer the symbolic R10.7 bln of inflation-linker, which was more than 3 times oversubscribed. As a result the aggregate amount of OFZ issuance in Q420 reached R2.4 trln, which is bigger than for the whole FY2019. The annual plan for 2020, set at around R5.1 trln, was exceeded by more than R370 bln, including the sovereign eurobond placement. In other words, “in advance” financing for the next year has already reached 10% of the annual target for 2021 (set at R3.7 trln). If we take into account the fact that a significant part of expenditures will be shifted from this year to the next, then the Finance Ministry will have no urgent necessity to borrow in Q121.GKEM Analytica expects the government to keep a relatively conservative position at the beginning of the next year, which assumes paying minimum premiums on the primary market and focusing on issuance of fixed-rate paper. The amount of placements will depend directly on foreign demand. Domestic participants are unlikely to demonstrate huge appetite for OFZ purchases (it can be estimated at around R80-100 bln per month), especially after the CBR’s close-to-hawkish statement last week. Foreign investors are likely to be interested in ruble sovereigns as both the exchange rate and the carry-trade opportunity look attractive. The recent weakening of the ruble, which lost more than 3% since the middle of December, creates a more comfortable entry point for international investors.Evgeny GavrilenkovAlexander Kudrin