U-turn in demand for the hryvnia-denominated state bonds

UKRAINE - In Brief 16 Dec 2020 by Dmytro Boyarchuk

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Yesterday, on Dec 15, all of us were shocked to see the huge demand for hryvnia-denominated state bonds that MinFin enjoyed. Just for one day the authorities attracted UAH 42.1 billion (nearly $1.5 billion), $266.1 million and EUR56.7 million. To compare, for 11M2020 MinFin managed to raise to coffers UAH 61.6 billion net in hryvnia (UAH 171.05 billion issued and UAH 109.5 billion repaid). To make matters worse, over recent months the authorities reported regular problems attracting funds from local market. But suddenly just in one day MinFin receives UAH 42.1 billion to cover the fiscal gap. A lot of talk is about the return of non-residents. Since Dec 9 non-residents’ portfolio in hryvnia-denominated state bonds has increased by UAH 2.3 billion (near $82 million). We observe steady appreciation pressure on the hryvnia in the FX market over the recent weeks, meaning that extra funds from abroad are indeed arriving. From Dec 7th the hryvnia strengthened by 1.8%, from 28.26 up to UAH 27.76/ USD. However, it’s unlikely non-residents would buy the whole issue of UAH 42.1 billion just in one move, especially if we take into account that the lion's share of the placement i.e., UAH 32.4 billion, has less than one year maturity (foreigners used to prefer long securities). Netting the placement from probable non-residents’ share we see an unexpected local demand for state bonds that popped up from nowhere. The main suspect is the refinancing the NBU had been generously providing to the banks over the recent months. From October until today, the NBU poured into the banking system UAH 59.9 billion (in many cases of long-term refinancing, up to 5 years). It looks like the NBU gav...