FRONT STORY CEEUkraine falls from favour
Asset prices sour for former market darling
GDP-linked warrants halve in value in a matter of weeks
Ukrainian bonds and warrants have
turned from investor darlings to ghoulish
holdings in a matter of weeks, with IMF
complications and fears over an
economic slowdown hitting the
sovereign.
Yields on UKRAINE‘s longer-dated bonds
have more than doubled since mid-
February, with the 9.75% November
2028s climbing from around 5.65% to
13.85%, while the GDP-linked warrants
have halved in value.
“Capitulation across debt markets,”
said Tim Ash, EM senior sovereign debt
strategist at BlueBay Asset Management.
The warrants have undergone a
particularly marked fall from grace.
The notes rode a spectacular rally last
year, rising from 57 to 96, as political
circumstances proved a huge boon for
investors and traders, especially the
election in April of former comic
Volodymyr Zelensky as president on an
anti-corruption ticket.
But as the picture around Ukraine has
soured, so has the price of the warrants.
Having climbed as high as 109 in the
middle of last month, they were bid at 53
on Thursday – though that’s potentially a
positive for the government as the buy
back cost has gone from US$3.4bn to
US$1.7bn, according to Ash.
Alexander Martynenko, head of
research at asset manager ICU, said a
series of political headlines had emerged
from Ukraine just as fears over the
impact of the coronavirus prompted
investors to abandon risk assets
wholesale.
“On the back of escalating risk-off
SENTIMENT û5KRAINESûRESHUFmEûOFûTHEû
government and sacking the Prosecutor
General looked quite untimely,” said
Martynenko.
The previous Prosecutor
General,Ruslan Ryaboshapka, was sacked
LASTûWEEKûINûAûSWEEPINGûRESHUFmEûTHATû
raised questions about the country’s
reform momentum.
“Many investors questioned the logic
behind the dismissal of key pro-WesternANDûPRO
REFORMISTûlGURESûINûTHEû
government. Ryaboshapka also has a
strong reputation of a skilled and an
independent professional in the West, so
his [departure] raised serious concerns in
the US and G7,” said Martynenko.
A key issue for Ukraine is its
engagement with the IMF, having
secured conditional approval for a new
US$5.5bn loan deal in December. But the
GOVERNMENTûRESHUFmEûTHISûMONTHûRAISEDû
some concerns about whether the new
cabinet would want to change the terms
of the agreement.
Martynenko said there were a number
of sensitive political issues to resolve. He
said land reform was likely to face
popular opposition, while reforms
regulating the compensation for former
owners of nationalised banks would face
very strong resistance from the erstwhile
proprietors of PrivatBank.
Ihor Kolomoisky, one of Ukraine’s
WEALTHIESTûTYCOONS ûHASûBEENûlGHTINGûTOû
reverse the 2016 nationalisation of his
former bank, PrivatBank, the country’s
largest lender.
“Recent changes in the government
ANDûTHEû0ROSECUTORû'ENERALûOFlCEûFUELLEDû
CONCERNSûOVERûTHESEûOWNERSûSIGNIlCANTû
INmUENCEûONû5KRAINESûCURRENTû
authorities,” said Martynenko.
Ash said a case could be made for the
IMF increasing the current proposed
Extended Fund Facility to US$10bn from
an agreed US$5.5bn, given the economic
effect of the coronavirus on Ukraine.
Disbursements are dependent on
reforms.
Even a dramatic fall in the oil price, with
Brent futures halving in value since the
beginning of March and dropping to US$26
per barrel, has failed to lift the gloom.
!SHûBELIEVESûTHEûBENElTûFORûTHEûOIL
importer might be negated by the
dampening effect of the coronavirus on
the global economy.
“Just imagine the potential losses from
reduced worker remittances,” said Ash.
“These had been bringing in net
receipts of US$1bn a month, but I guessUkrainian workers overseas, mostly
engaged in the service sectors in Poland
ANDûTHEû%5 ûWILLûBEûTHEûlRSTûTOûBEûLAIDûOFF û
ANDûTHISûCOULDûIMPARTûAûVERYûSIGNIlCANTû
hit on the balance of payments of
Ukraine, and more than making up for
an energy windfall.”
The hryvnia has also been under
PRESSUREû4HEûCURRENCYûMADEûSIGNIlCANTû
gains against the US dollar last year,
moving from 27.70 to 23.69.
But it has given up all of those gains
this year, depreciating to 27.85. That is
despite the National Bank of Ukraine
using up reserves and making a 100bp
cut to the main interest rate to support
the currency on March 12.
“The NBU has already spent over
US$2bn of its US$26bn reserves in its
efforts to support the hryvnia,” said
Martynenko. “Domestic players of the FX
market consumed over 99% of this
amount. This implies that the
deteriorating domestic sentiment is
currently much more critical for the
HRYVNIAûTHANûTHEûLACKûOFûFOREIGNûINmOWS
“Given the current panic mood in the
FX market, it is hard to predict when
and at which level the hryvnia stops
falling.”
Martynenko said he expected
Ukraine could meet its sovereign debt
obligations in the short term without
assistance from the IMF, but the lack of
a cushion from the fund and its
guidance over reforms could cause
investors to keep away from buying
Ukraine’s bonds.
But Pavel Mamai, partner at fund
manager ProMeritum, said it appeared
likely that Ukraine would do what is
required for the IMF programme, and the
government should adopt the required
reforms.
“I think Ukrainians do understand now
there is very little room for manoeuvre,”
said Mamai.
“When/if this is over, I think Ukraine
bond valuations are cheap enough to get
it on the buy list again,” he said.
Robert HoggInternational Financing Review March 21 2020 47EMERGING MARKETS
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