Stetsenko, ICU: Local Investors’ Share of Ukrainian Domestic Bonds Likely to Increase on Back of Recent Reforms
Since the beginning of 2019, international investors have been among the most notable players in the Ukrainian government bond market with total investment increasing to a record UAH 100 billion ($4 billion), accounting for almost a tenth of the total domestic public debt and up more than 10 times the amount seen in the same period last year.The increase was driven by a combination of several factors: strong fundamentals, high yields, and simplified access with Clearstream. These factors, as well as clear fiscal and prudent monetary policies, make Ukraine one of the top destinations for foreign investors.
“However, this trend is slowly shifting as we now see investments from local non-financial enterprises, insurance companies and private investors who are increasingly investing into domestic government bonds,” said Konstantin Stetsenko, Founding Partner, ICU Group, commenting from the sidelines of the Ukrainian Financial Forum, which took place on 27th September in Kyiv.
Of the domestic investors, Konstantin Stetsenko singles out non-financial enterprises as one of the influential players in the market. He believes that the treasuries of Ukrainian companies are entering a new phase of financial and risk management in Ukraine, using the securities market tools to not only to raise funds, but also to improve the liquidity management, Stetsenko added.
As of today, private companies hold UAH 25 billion ($1 billion) worth of domestic government bonds. These enterprises often prefer tapping short-term bonds as a more flexible and profitable alternative to bank deposits.
Konstantin Stetsenko adds that agricultural companies also use government bonds. In contrast to other non-financial enterprises, they see bonds not as means of effective liquidity management but primarily as an investment tool. Agricultural companies have their own traders who manage large volumes of liquidity. They typically have a long-term investment strategy and prefer long-term securities, said Stetsenko.
The insurance sector also invests in the domestic market according to ICU. The long-awaited “split” system was adopted into law recently. The purpose of the law is to reduce the number of regulators and supervisors in the non-banking financial services markets by allocating the functions of the National Commission, which carries out state regulation in the field of financial services between the National Bank and the National Securities and Stock Market Commission.
According to Konstantin Stetsenko, once the split is implemented, the number of insurers will likely go down. However, this is a positive as the market will become more transparent and more trustworthy as only companies with a transparent ownership structure and high-quality assets will remain.
The remaining insurers will have the opportunity to buy up the portfolios left by those non-transparent insurers exiting the market, thereby increasing their reserves. Given the regulatory requirements for the structure of reserves, insurance companies will choose to invest in high-quality assets, including government bonds. At the moment, insurance companies own UAH 8.8 billion ($0.35 billion) worth of government bonds. These numbers will definitely increase once the split law is implemented.
Over the course of the year, private investors have also invested in domestic government bonds as an alternative to bank deposits. Currently, more than UAH 10 billion ($0.4 billion) of domestic debt is held by Ukrainian citizens. Stetsenko believes that the share of retail investors in local fixed income market will increase drastically if the government introduces a more simplified market infrastructure for retail investor to participate in and also increase financial literacy amongst them.
Based on the above, ICU expects an increase in demand for fixed-income instruments from all four groups of local investors mentioned above. Pension funds could also be included in this list, if a long-awaited pension reform is introduced.
In addition, the steps taken by the Ministry of Finance and the National Bank to simplify investment procedures this year will further open up the market for foreign investors. Konstantin Stetsenko also points to the recent decision to hold bond auctions through the Bloomberg terminal which will have a positive impact on market development. This will make the placement process more transparent, efficient and will increase the number of primary dealers via foreign institutions.
With international investors holding a wide range of government securities with different tenors, trading through Bloomberg would enable active trading between local and foreign investors. This would increase transparency of deals in the secondary market, and of course, improve the market liquidity of the local paper.
On top of that, the Ministry of Finance’s plans to include Ukrainian UAH-denominated paper in international indices and that will be a game-changer for the market, adds Stetsenko. He believes that the inclusion would be instrumental in further developing the local market infrastructure. This would allow investors to not only trade in T-bills but also corporate bonds. This would allow Ukrainian companies to attract local-currency financing both from local creditors and international investors, without FX risks.
Stetsenko believes that the market will evolve as investors shift their strategy to invest in longer-term instruments that support active trading rather than focusing on short-term investing in UAH-denominated bonds. He believes that Ukraine is taking all the necessary steps to make Ukraine an attractive investment hub for both local and foreign investors.
About #UkrFinForum19
The Ukrainian Financial Forum is one of the main financial events in Ukraine. The forum was launched by the ICU in 2014 and is held annually to revitalize the economic debate in Ukraine and attract leading international experts to discuss the country's economic changes.
At the forum, experts from leading global financial markets, including China, the USA and the UK, share exclusive insights on the prospects of global economies for the coming years. Representatives of the Ukrainian government and top Ukrainian businesses talk about the impact of global financial processes on Ukraine and reform plans in their areas.
About ICU
ICU is Ukraine’s leading independent investment manager and advisory company which specializes in investing in the emerging markets of Central and Eastern Europe. It has total assets under management exceeding $500m. Since it was founded in 2006, the firm has built a successful track record in high yield corporate debt, distressed debt, restructurings and other special situations across a number of emerging markets. The company aims to provide their clients with superior risk-adjusted returns across a number of asset classes. Last year, the firm launched ICU Ventures, ICU’s venture capital arm which focuses on investing in early stage technology companies with Eastern European or Ukrainian roots. ICU is continuing to expand its reach into key European markets through a blend of organic growth and acquisition and continues to expand the range its investment offerings.
By James Oster