Morgan Stanley doubts Ukraine's govt plans for 2021
Morgan Stanley analysts believe that the plans of the Ukrainian government to finance the lion's share of the UAH 208 billion deficit provided for in the draft state budget 2021 in the domestic market through the placement of government bonds are overstated, which, in their opinion, increases the likelihood of unscheduled placements of eurobonds and pushes the country to cooperate with the International Monetary Fund (IMF) and other international financial institutions (IFIs).
The net issue for the whole year in the amount of UAH 208 billion will require an average monthly net issue of UAH 17 billion, which is much higher than the current level, the bank said in a study issued this week.
The analysts said that since the beginning of this year, the net issue of government bonds amounted to only UAH 31 billion, moreover, in July and August it was negative – in the amount of UAH 6 billion and UAH 13 billion, respectively.
Morgan Stanley also drew attention to the fact that the maturity of the securities sold dropped significantly: since March, there were no bonds with maturity of more than three years, most government bonds were up to a year, which leads to the need to increase their refinancing.
According to the report, the share of nonresidents of the domestic government loans market in Ukraine, as well as in similar markets in countries such as Egypt, Ghana or Sri Lanka, continues to decline. Since February, the government bonds portfolio of nonresidents has already decreased 47% in hryvnia, and the share of the total volume – from 17.5% to 11.4%.
According to Morgan Stanley, difficulties with domestic financing of the deficit, which the government set at a level exceeding the expectations for 6% of GDP, may lead to both a reduction in the deficit and the need to increase its external financing several times from the planned $1.1 billion (UAH 32 billion). At the same time, the analysts consider the current forecast of the Ukrainian government for the placement of eurobonds in 2021 for $3 billion to be high.
This situation emphasizes the importance of official external financing for Ukraine, but the current program with the IMF is already with disruption of the schedule even before its first review. Morgan Stanley recalled that this situation is typical for Ukraine: five previous programs with the IMF were financed by only 40%, while the current Stand-By Arrangement of SDR 3.6 billion (about $5 billion) is already financed by 42%. According to the analysts, taking into account the number of current unresolved issues in cooperation with the IMF, obtaining even one tranche of $0.7 billion this year looks hard to achieve.
In this regard, the analysts do not rule out another issue of Ukrainian eurobonds this year, if there is such an opportunity in the market. They also maintain neutral guidance on the country's eurobonds, favoring the long end of the curve, and view Value Recovery Instruments (VRIs) as more promising thanks to the first payment in 2021, the possibility of high payments in 2023 after a likely rebound in GDP in 2021 and the potential for further buybacks.