Ukraine aims to restructure central bank-owned bonds

Ukraine’s Finance Ministry is aiming to restructure its local bonds that are held by the National Bank of Ukraine (NBU), the capital.ua news site reported on Jan. 10. The ministry will aim at extending their maturity, smoothening peak repayments and linking the cost of debt to inflation, capital.ua said, citing a MinFin official. Ukraine’s 2017 state budget allows the government to implement such a restructuring.

As of end-2016, the total amount of local state bonds outstanding was UAH 667 bln (USD 24.6 bln), most of which will mature in 2017-2020 (the longest maturing in 2029) with coupon rates of 9.5%-18.5%. In the last two days of 2016, MinFin increased its issue of local bonds by UAH 117 bln, most likely due to the recapitalization of Privatbank. Of all the bonds, 57% (UAH 382 bln, or USD 14.1 bln) were held by the NBU as of end-2016. Also, we estimate that about UAH 200 bln (or 30% of total bonds) were kept by three state banks, including the recently nationalized Privatbank.

Alexander Paraschiy: This maneuver eliminates any problems related to the state deficit this year, with no tangible effect for future years. Reducing the coupon rate of bonds held by the NBU would result in less budget expenditures related to debt-servicing, but it would automatically lead to a corresponding decrease in the NBU’s profit. This profit is supposed to become part of the state budget revenue in the next year. So, the government can count on a reduced budget deficit (or kept within its plan) in 2017.

Extending the bonds’ maturity won’t have any material effect, considering the government has typically resorted to refinancing its matured bonds in the past.