Market Digests Backlash From White House Clash

Bonds: New reserve bond allows Ukraine’s Finance Ministry to increase borrowing

Last week, the MoF sold a new 3.5-year paper for UAH10bn, which is expected to be designated as a new reserve bond soon.In the primary bond market, the MoF sold the usual military bonds for just UAH1.9bn and new 3.5-year notes for UAH10bn. New bonds maturing in August 2028 received over 3x oversubscription with interest rates not higher than 16%.

New bonds were the most traded in the secondary bond market, with a 23% share in weekly trading, pushing the total turnover up by 24% to UAH16.9bn. Almost 1/3 of trading was in UAH bonds maturing this year.Last week, the MoF redeemed the largest-ever bond issue of almost UAH41bn. The next redemption of UAH20.6bn is scheduled for 12 March.After last week’s redemptions and borrowings, the total rollover in all currencies fell to 71% YTD from 79% in January. Rollover of UAH debt fell to 71% from 140% in January.

ICU view: Most likely the MoF no longer expects significant demand for military bonds, and it decided to launch a new issue that may be added to the list of reserve bonds soon. Offering new paper allowed the MoF to refinance a large part of last week’s redemption.

Except for banks, which are interested in reserve bonds of all maturities, most investors prefer short-term securities that they buy in the secondary bond market. Therefore, new bonds with maturities of 16 months or longer do not see large demand. The secondary bond trading structure shows the same: banks trade new reserve notes, while small investors purchased short-term bills, mostly due in March, April or June. This week, we will see similar auction results and MoF borrowings will be dominated by reserve bonds.

To achieve a 100% rollover in 1Q25, the MoF has to borrow more than UAH40bn in March, which is unlikely if the offer of reserve bonds does not increase.

Bonds: Market digests backlash from presidents’ meeting

The key event of last week was the meeting of the presidents of Ukraine and the United States at the White House, which ended inconclusively after an emotional conversation. This week, the market will try to understand the further prospects of a peace deal. Last Wednesday, the Ukrainian government approved a draft agreement on minerals, called the agreement on the Reconstruction Investment Fund, but judging by its wording, it is no more than a cooperation memorandum and, most importantly, does not contain security guarantees for Ukraine.

The signing of this agreement was supposed to be the key event during the visit of Ukraine President to the White House. However, the negotiations were not held, and the agreement was not signed, as the meeting ended early due to emotional outbursts and accusations of ingratitude from the Americans.At the beginning of the week, Eurobond prices slightly rose, but on Wednesday, they began to fall again. On average, Eurobond prices did not see material change during the week. VRIs lost 1% last week. Their price declined to 83 cents on the dollar of notional value. The EMBI index rose by 0.9% last week.

ICU view: Last Friday’s meeting at the White House ended with a negative note for Ukraine. This week, the market will try to best guess the further prospects of the peace deal and the chances of Ukraine resuming constructive talks with the US. Over the weekend, there were several meetings of the president of Ukraine in Europe, which indicated strengthened support for the country in sharp contrast to the trend in the relations with the US. The European leaders promised to develop their plan for a peace deal for Ukraine.

We expect volatility to persist in the Eurobond market in the coming weeks.

FX: NBU strengthens hryvnia despite high deficit

The foreign currency shortage in the FX market remained significant, which did not prevent the NBU from strengthening the official hryvnia exchange rate to a new high YTD.The total hard currency deficit fell by 43% WoW to US$497m, mainly on lower net purchases on the interbank FX market. Last week, the sale of foreign currency by bank clients (legal entities) was up by 10% while purchases declined by 17%. In the retail segment, net purchases contracted 12% to US$138m.

The NBU reduced interventions by 38%, but they still remained significant at US$742m.On Friday, the NBU decided to strengthen the official hryvnia exchange rate to UAH41.43/US$, the strongest level since November. The official hryvnia exchange rate is up by 0.4% last week and 1.4% YTD. The cash exchange rate in systemically important banks decreased to UAH41.3-41.8/US$ at the end of the week, or by 0.3% for the week and by more than 1% YTD.

ICU view: Higher supply at the end of the month was driven by the need for exporters to make tax payments, and they sold export proceeds to accumulate hryvnia liquidity. Coupled with lower demand, this allowed the NBU to keep the hryvnia close to the three-month peak despite a decrease in interventions.

However, we expect the NBU will move to a gradual weakening of the hryvnia in the following few weeks, moving towards about UAH46/US$ at the end of this year while the need for weekly interventions may be slightly up.

Economics: Staff-level agreement reached on 7th IMF program review

Last Friday, the IMF and Ukraine reached a staff-level agreement on the seventh review of the EFF arrangement.

Following approval of the IMF Board, Ukraine will receive a US$0.4bn loan tranche bringing total disbursement to US$10.1bn out of US$15.5bn earmarked under the program. The IMF noted that the program performance remains strong with all quantitative criteria being met while seven out of eight structural benchmarks were completed on time and one with a delay.

Also, Ukraine requested that a portion of unused the IMF loan be shifted back due to a revised profile of balance of payment needs. At this point, no details about changes in the 2025 BoP profile were provided by the IMF. The two other noteworthy messages from the press release are a marginal revision of 2025 GDP forecast to 2-3% from 2.5-3.5% previously and a reminder that a treatment of GDP warrants remains one of the prerequisites for restoring debt sustainability.

ICU view: Successful completion of the seventh IMF program review was widely expected, especially after the Ukrainian parliament voted to set up new High Administrative Court. We expect seamless approval of the review by the IMF Board in March. We expect a publication of MEFP to see how the projected 2025 BoP profile changed so that it triggered a rescheduling of the IMF assistance to later periods.