Ukrainian Government Bonds – a Piece of Cake for Foreign Investors

Due to the support of international donors, European business interest towards Ukraine will grow

As both the European and the US interest rates keep sinking, investors wonder off the beaten path to look for new investment opportunities in emerging markets. After the years of political and economic uncertainty, Ukraine has shown a distinct pattern of strong economic performance. This has been based on the recovery of private consumption after the recessions, stabilized inflation rate that shifted to single-digit values, and the establishment of close collaboration with the EU and the IMF. In 2019 Ukraine became one of the main destinations for the risk-tolerant investors in search of high yields.

The reasons for the strengthening of Ukraine’s account are the country’s reorientation of exports toward the European Union as a part of the Association Agreement, the resulting strong growth of the Ukrainian economy in the years following the two recessions, in 2009 and 2015, and the government bonds yield rising to double-digits. In winter 2019 the nerve-wracking path of elections has manifested itself in securities markets with all shades of bond price volatility, but after the newly-elected president Volodymyr Zelenskyy and his Servant of People party restated their commitment to continuing the reformist, anti-corruption agenda, investors have been encouraged that the pro-European reform path is going to accelerate over the next few years. According to Oliver Williams, emerging market debt portfolio manager at Insight Investment, the close collaboration of Ukraine with the IMF in the handling of the Ukrainian external debt (approximately 60 percent of its GDP) gives investors faith in the country’s debt repayment profile over the medium term. Only in 2019 Ukraine is expected to receive two billion dollars as a part of the IMF support.

At the end of 2018, Ukraine caused quite some buzz by reaching its seven-year high of 3.3 percent economic growth, catching the eye of the global investor community. And if the followers of the Ukrainian story found the performance of 2018 startling, seeing the country’s economic growth reaching 4.6 percent at the end of the second quarter of 2019 surged the level of investors’ confidence even higher. This exceptional performance was facilitated by striking numbers of the grain harvest and steep exports of grain, outpacing Russia for the first time in three years and making of Ukraine the first grain exporter worldwide.

Apart from being attracted by the performance of the outstanding export, another factor fund managers find appealing is the “orthodox” approach of the central bank to tighten monetary policy by setting interest rates even higher. While still far away from the target range, in 2019 inflation rate finally entered single-digit numbers and hit 7.5 percent in September. In its turn, the interest rate has been set to almost double the inflation rate – at 17.5 percent. According to the Financial Times, in 2019 the hryvnia was ranked as the second best performing currency by growing 9 percent against the dollar. Such double-digit yields on local currency government bonds are considered to be some of the highest among emerging markets.

Overall, the exchange rate has been significantly liberalized with the opening of the international securities depository Clearstream, in May 2019. On top of making entry to the Ukrainian market easier, reducing costs, and improving the efficiency of settling the deals, Clearstream boosts liquidity of Ukrainian bonds. From now on, investors will not have to go through expensive local brokers. The Ukrainian government, in its turn, benefits from higher volumes of borrowing at lower cost.

So far, the new government path of compliance with the supervision of the EU and IMF backed pathway, the improving economic environment, stabilised the exchange rate and the choice of political and economic reforms in Ukraine strengthened investors’ confidence. As an effect, the combination of speeding up economic growth, stabilizing exchange rates, and settling the path of pro-European reforms made Ukraine extremely attractive to foreign investments. The improved prospects of the country’s economy are reflected in the decision of S&P Global Ratings to upgrade the rating ‘B-’ to ‘B’ of the long-term foreign and local currency sovereign rating on Ukraine. According to Mykhailo Rebryk, Raiffeisen Bank Aval in Ukraine, and Andreas Schwabe, RBI, in the first half of 2019 the share of the portfolio held by foreign investors grew 10 times and reached its 12 years maximum of approximately 2.1 billion euros. Investors thirsty for high yield funds are attracted to Ukraine in view of the high interest rates on offers in debt denominated in local and foreign currencies. During its first offer to international markets after the elections 2019, Ukraine sold one billion worth of Eurobonds with seven-year maturity at the rate of 6.75 percent per annum. This is the first time in 15 years that Ukraine issues Eurobonds denominated in euros.

Finally, the interest of foreign investors in Ukraine is expected to increase in the future, as the volatility of the country’s economy is minimized through continuing collaboration with the EU, the IMF, and other international partners, facilitating the stability of the political situation and further introducing pro-European reforms.

Anna Gubanova, Candidate for MSc in Financial Management, Vlerick Business School, Brussels