March 28, 2018 / 3:06 PM / 25 days ago

Foreign appetite for Ukraine local debt spurs Kiev to ease access

KIEV, March 28 (Reuters) - Ukraine will make local bonds tradable through a cross-border settlement house in the coming months to capitalise on foreign investor appetite for hryvnia-denominated debt and attract much-needed foreign currency, the finance ministry told Reuters.

Currently there are no restrictions on foreign funds or companies buying Ukrainian government bonds denominated in local currency, but the process is time-consuming due to myriad legal and bureaucratic requirements.

Nevertheless, aggressive rate hikes by the central bank has boosted interest in domestic bonds. Foreigners’ holdings have tripled to 14.7 billion hryvnias ($556 million) from 5.2 billion hryvnias since the start of 2018.

This has provided a welcome influx of foreign currency, helping to stabilise the national hryvnia currency after a period of volatility and to boost reserves ahead of hefty external debt payments.

BOTTLENECKS

The finance ministry plans to encourage this trend by making it easier for foreigners to trade.

“We’re analysing the bottlenecks and looking for ways to eliminate the inconveniences. One of the planned steps is to create a link between the Ukrainian depositary system and the international depository,” it said in emailed comments.

It did not say which external clearing institution it had in mind, but last July Finance Minister Oleksandr Danylyuk said he planned to talk with Euroclear.

Similar moves have proved successful elsewhere in the region. In 2013, foreign investors quintupled their holdings of Russian treasury bonds after international settlement services opened up the local market.

In Ukraine, increased trading of this sort will further support the hryvnia because investors must sell their dollars or euros on the local market to receive the hryvnias needed to buy government bonds at weekly auctions.

“Ukrainian bonds offer investors a higher yield than in other countries with a similar level of risk. This, together with the relatively low volatility of the exchange rate, makes such investments very attractive,” the ministry said.

The bonds are likely to remain attractive as the central bank has signalled it will stick to a hawkish policy that has seen four consecutive rate hikes - the latest a percentage point increase to 17 percent in early March.

“Investors who expect to earn in a long-term prospect will buy government bonds because the coupon of 16.1 percent on two-year papers and 16.15 percent for a three-year period is very good for them,” said ICU financial analyst Taras Kotovych.

This will also boost reserves at a time when Ukraine faces foreign currency debt payments of around $7 billion in both 2018 and 2019 and is struggling to implement reforms needed to unlock further loans under its $17.5 billion International Monetary Fund programme.

Kiev wants to take advantage of the appetite for hryvnia bonds and reduce the share of foreign currency-denominated debt, which stood at nearly 69 percent of Ukraine’s total debt worth $76.8 billion as of February 28. ($1 = 26.4400 hryvnias) (Editing by Alessandra Prentice and Gareth Jones)

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