Government hopes to sell dollar-denominated bonds to households
Ukraine’s government is looking to tap private foreign currency savings by issuing retail bonds to individuals, a move seen as an attempt to raise cash amid difficult capital markets.
The cash-strapped government this week raised $2 billion through a Eurobond issue. But with a 9.25 percent yield, the 5-year dollar bonds proved to be Ukraine’s most expensive issue in twelve years.
The state is also vying for cheaper financing by offering bonds to households. Experts note that, if successful, it could bring large private currency reserves out of the shadows, patching up stretched government finances in the short-term while helping citizens earn attractive returns.
Seen as desperate by some, the domestic bond plans reflect the fragile fiscal position of President Viktor Yanukovych’s government months after boosting social expenditures in a bid to win back disgruntled voters ahead of the Oct. 28 parliamentary elections.
The Finance Ministry plans to issue at least $200-300 million through an issue of dollar-denominated retail bonds this fall, according to news agency Interfax-Ukraine. The bonds are expected to have a two-year maturity and nominal value of $500. The coupon will be paid semi-annually, though the yield has yet to be determined.
Taras Kotovych, analyst at investment bank ICU, said the return should be somewhere between the 9.25 percent on dollar-denominated bonds and the 7.5 percent offered on average by commercial banks on dollar deposits. In a note to investors, ICU wrote the issue could attract demand, but predicted the maturity would be too long for most retail investors.
A further problem, the investment bank added, is that many citizens could shy away from giving their money to the government. Trust is weak as citizens still remember how their savings disappeared when a Soviet bank went bust more than two decades ago.
Nonetheless, the retail bonds could present an interesting opportunity for some individual investors. Figures suggest the amount of foreign currency outside the domestic banking system could be as high as $80 billion, or close to half the country’s gross domestic product Given fairly attractive yields, part of those shadow reserves could finally earn some interest.
"Remaining cut off from external markets, the government continues to explore unconventional sources of domestic foreign exchange funding," reads a report by Kyiv-based investment bank Dragon Capital. "We think government borrowings from households will be limited to several hundred million dollars this year, but may potentially become a substantial source of funding in the medium term."
The government is struggling to keep the ship afloat before the fall election. The result has been unorthodox policy, from currency exchange restrictions to the creation of devaluation-insured bonds.
A politically sensitive currency peg to the dollar is bearing down on international reserves, which fell from $38.2 billion in August 2011 to $29.3 billion last month. According to estimates by the International Monetary Fund, maintaining the current policy could cause a further drop to $24.4 billion by year’s end.
The IMF last year froze disbursement of multibillion-dollar low-interest loans to Ukraine amid lackluster reforms. This, together with an impasse in natural gas price negotiations with main fuel supplier Russia has strained Kyiv’s cash position. While the bond issue was successful it came at a high cost, and analysts expect a deal with either Russia or the IMF after the elections.
To unlock its loans, the IMF wants Ukraine to increase gas tariffs for households which are heavily subsidized. The imprisonment of former Prime Minister Yulia Tymoshenko has also not helped, in effect putting Yanukovych’s administration on the verge of international isolation.