Gov­ern­ment hopes to sell dol­lar­de­nom­i­nated bonds to house­holds

Kyiv Post - - Business - BY JAKUB PARUSINSKI [email protected] Kyiv Post staff writer Jakub Parusinski can be reached at [email protected] com.

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 de­val­u­a­tion­in­sured 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.

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