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ICU Research: UkrFinForum-2018: Outlook and opportunities in Ukrainian domestic sovereign and corporate bonds

September 27, 2018 | Cbonds

Sovereign bonds. The government bond market is actively developing. Konstantin Stetsenko, Managing Partner of ICU, pointed out that the market is getting deeper in terms of the number of investors, and over the past 12 months, the portfolios of individuals have grown sixfold, and will continue to grow at similar multiples, if not in dozens of multiples. Foreign investors’ portfolios also rose over this period of time.
This growth has been driven by the increase in rates that follow the NBU key rate, which currently exceeds 18% at a time when inflation is declining. At the same time, investors receive significantly higher income from bonds compared with deposits, and this is especially noticeable for FX-denominated T-bills. Simplifying the purchase of T-bills, including the possibility of purchasing bonds online through a mobile application, is expected to increase the investments of individuals in government bonds. For example, launching such a service, PrivatBank expects the migration of foreign currency deposits in FX-denominated government bonds in the amount of $1.5–2bn.
In addition to individuals and foreign investors, insurance companies are also increasing their investments in T-bills. The gradual change in terms and conditions that adhere to European norms contributes to the increase of their reserves and, consequently, investments in T-bills.
After all, a significant part of the funds should be invested in low-risk assets, the main portion of which are T-bills.
One of the problems, especially for foreign investors, is that T-bills are traded on several exchanges, often only over-the-counter. For the sake of transparency and confidence in the market, transactions should be consolidated, which would also facilitate calculating an accurate yield curve. The Bloomberg terminal already incorporates these technological solutions, which were presented to the participants of the discussion. Primary dealers can play an important role in increasing transparency and trust by making markets, the beginnings of which were announced on Panel 6 B (see above). For them, there should be some preferences and obligations with sanctions for non-fulfilment. And the primary dealers themselves should be bidding on the Bloomberg system.

Corporate bonds. The corporate bond market is closely linked to the government debt market. And here the same questions arise: market liquidity, secondary-market support, transparency, and credibility, the same as for government bonds. Most investors are banks, but this market needs to be expanded to include insurance companies and pension funds as well as foreign investors. It is also very important to restore interest in bonds issued by companies themselves, since the number of issues is very small. For better transparency and credibility, improvements in legislation and regulations, improvements in the issuance mechanism, introducing a simplified prospectus, and issuing procedures are ongoing.
As for investors, the interest of foreign investors was estimated at US$500m, and this may be a rather active interest. But in order to attract them, it is necessary to ensure market liquidity, sufficient volume of issues, and an active market.
At the same time, confidence in the issuer is important for domestic investors, in partICUlar insurance companies. Currently, they are interested in bank bonds, followed by quasisovereign issues, and only then companies.

Company: ICU

Full company nameICU
Country of riskUkraine
IndustryFinancial institutions


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