Risks in a billion

Риски на миллиард

The main owners of government bonds remain banks and the national Bank respectively 258,93 billion and 337,1 billion. Overall, the volume of government bonds in national currency in circulation on 22 April 2019 was 648,71 billion at face value. At the same time, foreign investors are rapidly increasing their investments in hryvnia government bonds. April was a record: on April 18 in the hands of foreigners was concentrated in securities by 30.88 billion. Whereas in the beginning of the year (on January 3, 2019) portfolio made up only of 6.14 billion. In fact, in less than 4 months it has increased in 5 times.

Important, not the amount, but the rate of increase of the arrival of speculative capital in Ukraine. The reason hryvnia government bonds give investors a very high real yield (nominal yield 18-19% minus inflation of 9-10%). This is one of the highest real yields of government bonds in national currencies in the world. Although many experts agree that the increase in the share of nonresidents in the portfolio of hryvnia government bonds represents a danger for the stability of the hryvnia.

“The fact that non-residents buy the currency for hryvnia bonds – a dangerous thing. After all, they have to buy government bonds in national currency convert us dollars into hryvnias and thereby stimulate the revaluation of the hryvnia, but when will be repaid in hryvnia government bonds and non-residents will begin to buy US dollars, the devaluation of the national currency”, – said President of the Ukrainian analytical center Alexander Okhrimenko. According to him, the devaluation of the hryvnia last summer (in the period from 1 June to 5 September 2018 the hryvnia fell against the dollar by 9%), was due to the large volume of repayment of hryvnia government bonds, the proceeds of which were converted by non-residents in foreign currency.

Agrees with him and Professor of the Kiev national economic University. Vadym Hetman, the head of the NBU Council Bohdan Danylyshyn. “Last year we saw the entry of foreign speculators from investments in Ukrainian government bonds led to a significant depreciation of the national currency observed from late June to early September. It is obvious that the role then played by the high oil prices, the need for gas injection into UGS, the delay in the export of agricultural products, which takes place in June and July, at the crossroads of agricultural marketing. However, a serious amount of redemption of government bonds, the proceeds of which non-residents converted in foreign currency, also contributed to the devaluation of the hryvnia”, – says Bohdan Danylyshyn. He notes that some of these factors can take place this year.

The current political turbulence is a risk that non-residents can record the income, and thereby to devalue the hryvnia. “The residents are very sensitive to sharp fluctuations and increased risk. Therefore, under adverse market conditions, the position of nonresidents in government bonds will be closed, and the currency withdrawn. This will put strong pressure on foreign exchange market”, – said the Deputy Director (investment and capital), KPMG in Ukraine Andrey Usenko.

Yet, according to investment businessmen, high rate of hryvnia government bonds and high discount rate of the NBU, non-residents outweigh the current political risks.

Since the beginning of the year the volume of investments of non-residents in bonds of domestic government loan rose 5 times

Meanwhile, Ukraine intends to simplify the access of foreign investors to the local market of government bonds. The NBU and Finance Ministry are interested in raising funds in government bonds and simplifying their trading platforms Bloomberg and Reuters. The first step is already done – signed an agreement on opening a correspondent account with the international Depository Clearstream system. The availability of “linka” international Depository Clearstream to the Depository of the national Bank and plans to auction government bonds in the Bloomberg and Reuters will simplify the access of foreign investors to the local market of government bonds.

Analysts and bankers do not deny that the demand for government bonds after simplifying trading terminals will increase significantly, which will strengthen the hryvnia. Although the NBU and the Finance Ministry has not yet assessed how can increase the share of non-residents, after the appearance of “link” with Cleanstream and withdrawal of bonds on the international trading platform.

According to respondents, Delo.ua bankers it could be $1-2 billion, According to analysts Goldman Sachs, the volume of investments by nonresidents in government bonds in the near future may increase by 30% from current volume. In addition, in late March, the NBU Council recommended a review of the share of government bonds in the asset structure of banks from 25% (according to the principles of strategic reform of the public banking sector) downward. That is also reflected in the increase in the share of government bonds in the portfolio of non-residents. But in all cases it is very big money for Ukrainian currency market, NBU will not be able to restrain the appreciation of the hryvnia.

Andrey Usenko sees an urgent need to balance the Ukrainian t-bills market by private entities and local investors, legal entities. The ability to buy government bonds individuals received only last year, however, they, unlike non-residents, with more focus on foreign bonds, having a negative experience of deep devaluation of the hryvnia in previous periods.

Hope Mikhalchuk, especially for Delo.ua