Ukraine state bonds portfolio jumps UAH 20.7 bln on Dec. 31

The National Bank of Ukraine (NBU) increased its state bonds portfolio by UAH 20.7 bln on Dec. 31, reported its web site on Dec. 31. Last year, the NBU purchased UAH 171 bln in state securities, thus ballooning its portfolio of state bonds by 2.2x YTD to UAH 318 bln from UAH 147 bln at the year start. A large part of the Dec. 31 state bonds purchase was related to Naftogaz support (UAH 96.6 bln), while the rest of the sum was allocated for budget deficit funding and support for the State Deposit Guarantee Fund.

Alexander Paraschiy: Hryvnia printing in 2014 was tremendous. To understand the scale, one needs to consider that 44.9% of state bonds in total circulation as of Jan. 1, 2015 were issued last year, and 83.3% of last year’s bond issues were funded by the NBU. Such volumes were among the main reasons why the national currency continued devaluing strongly in 2H14, even after the current account deficit shrunk substantially by the middle of the year.

Unfortunately, this “national quantitative easing” does not look to stop in 2015. The NBU will have to print at least UAH 131 bln more to finance the state deficit and quasi-fiscal expenses in 2015, according to the state budget approved on Dec. 29, let alone a potential revenue shortfall of nearly UAH 30 bln and UAH 65.4 bln in direct support from the NBU. Against this backdrop and in light of the 2014 experience with hryvnia printing, we expect further currency devaluation in 2015 unless a much stricter spending plan is offered by Ukrainian government after its consultations with the IMF mission in January.