Ukrainian sovereign Eurobonds surged 25% year-to-date, the most on record, and are second only to Costa Rica’s (+26%) now. The main growth drivers have been undervalued price levels, demand for high-yield assets and the victory of pro-Western candidate Vladimir Zelensky in the presidential election.

All in all, we believe that the upside potential is still strong due to the low base effect in previous years — during the crisis of 2015 GDP dropped to annual rate of −15%, and after four years of stagnation the economy has bound back with the growth rate of 5% in the first half of 2019.

Ukraine's long-term bonds now yield 400-500 bps lower of what they did eight months ago due to recent strong surge in demand.

With the economy picking up, we expect real GDP to grow 3% in 2019, the current account deficit to shrink to −1%, the budget balance to improve to −2% and debts to decline partially amid of one of the highest debt/GDP ratios among CIS countries.

FX reserves increased by $5 bln to $21 bln over the past 12 months, the government’s short-term and mid-term bonds (up to 5 yrs maturity) now amount to $18 bln, long-term liabilities (over 5 yrs maturity) amount to $22 bln, a total of slightly above $40 bln.

Ukraine external debt payments, $ mln

Ukraine external debt payments

One of the key factors that may drive further growth is a possible upgrade of the long-term sovereign rating to B (Belarus level), from the current CCC+/B-, in the near term.

Moreover, given Ukraine's debt/GDP ratio is lower than Belarus’ by 20 pp, we believe that if the spread remains, it should narrow significantly.

Growth drivers

  • Ukraine is rated below Belarus by one notch. Ukraine’s current long-term bonds premium of 120 bps should not effectively exceed 50 bps. Therefore, we expect the bonds’ price to climb by 5%
  • Some Ukrainian state-owned entities look even more attractive, such as Ukreximbank with potential yield downside of 150 bps, and a 3% price upside; Oschadbank and, to a lesser extent, the Ukrainian railways
  • We believe that on the price side, Ukraine's quasi-sovereign bonds lag significantly behind the sovereign bonds, and the latter, in turn, lag behind other similar rating CIS states’ bonds

Top picks

Ukraine top picks

Ukraine and CIS yields curve

Ukraine and CIS yields curve

Source: National statistics agencies, IMF, ITI capital

Given that high debt/GDP ratio is Ukraine's major challenge, the country’s FX bonds coverage ratio is slightly below Argentina’s, standing at 80%.

Debt/GDP ratio

Source: IMF, ITI capital

Ukraine’s GDP

Ukraine’s GDP

Source: Bloomberg, ITI Capital

Искандер Луцко
05.09.2019