Ukraine buys back 5.6% of GDP warrants in December, treasury data implies

Ukraine’s Finance Ministry spent UAH 4,635 mln in December
on operations with state derivatives, GDP warrants issued in 2015-2016 (UKRAIN 2040),
according to budget spending information provided by the State Treasury.

This purchase happened as Ukraine’s Cabinet allowed
MinFin on Dec. 9 to spend up to UAH 5.6 bln for operations with state
derivatives in December. This became possible as the state budget plan to spend
UAH 158.6 bln for state debt servicing in 2021 was corrected downward (in fact,
MinFin spent UAH 8.6 bln less for debt servicing than initially budgeted last
year).

Alexander Paraschiy: Based on
this information, we calculate that MinFin spent about USD 170 mln to purchase
GDP warrants in December and purchased them for par value of about USD 183 mln
(the warrants’ average market price in Dec. 10-31 was close to 93.5% of par).
This implies MinFin bought back about 5.6% of initially issued warrants in
December.

Together with the amounts bought back in 2020,
we calculate that Ukraine has purchased warrants for total par value of about
USD 538 mln, or 16.6% of initially issued instruments (USD 3,239 mln).

The state budget for 2022 allows for the further
purchase of warrants based on permission from the Cabinet. While in 2021, the
warrants were purchased by using money saved on state debt interest payments,
this year the situation might change. At least, currently state bonds are
placed at higher rates than in 2021, meaning MinFin might not have such
opportunity (though, other sources could be allocated for the purchase as
well). Today’s prices of Ukraine’s GDP warrants are way below the December
levels (due to increased fear of Russian aggression), though it is unlikely
that the Cabinet would allow MinFin to buy back the warrants these days.

MinFin’s move to buy back the warrants indicates it
sees good reasons for them to appreciate in the mid-term. Although we see
little payments on GDP warrants in the next three years (some tiny payments –
if any –in 2023 and 2024, no payments in 2022), we continue to believe this
instrument remains an attractive mid-term investment.