Bond traders were pleased with the outcomes of both the first round of the Ukrainian presidential election and the Turkish local elections at the weekend with their respective eurobonds rallying on the results.
“Ukraine and Turkish Eurobonds benefit from the elections outcome. Ironically the Ukrainian Eurobond market cherished the outcome predictability with [the incumbent] Mr [Petro] Poroshenko and [outsider and comic] Mr [Volodymyr] Zelenskiy going into the second round of the presidential polls, while markets took a positive note of Mrs [Yulia] Tymoshenko’s failure,” Raiffeisen Bank (RZB) analyst Gintaras Shlizhyus said in a note.
“We continue to believe that Ukraine’s risk is priced excessively, which implies more spread compression after 21 April’s presidential polls with either candidate likely suiting the markets,” Shlizhyus added.
Appealing to bond holders will be important as Ukraine has a debt mountain to climb this year: it has to pay off, or refinance, $15bn of bonds maturing in 2019 and $21bn in 2020.
Goldman Sachs estimated in a note that Ukraine could double its average eurobond issue of recent years to as much as $6bn in 2019 and as foreign investors become increasingly active on the domestic bond market the finance ministry could raise another $2bn in dollar-denominated local issues. Access to the market should be improved this year when the Ukrainian capital markets get hooked up to international settlement and clearing system Clearstream.
Turkey busily takes advantage
Turkey has also been busily taking advantage of the opening of a bond window with a string of issues in the last few months, highlighted by a $1bn eurobond issue in March that got away to high demand, even though the Turkish economy has fallen into recession for the first time in a decade.
It seems that foreign sentiment for Ukraine in particular is improving despite the economy’s weak recovery. Ukraine saw a net inflow of capital of $6.6bn in 2018, according to the Institute of International Finance (IIF), while its erstwhile rival Russia saw outflows of over $75bn. And the IIF is forecasting that Ukraine will receive another $5.8bn of net capital inflows this year.
“We find Ukraine still at least 100bp cheap to EM peers though the prolonged election uncertainty while October parliamentary polls may prevent spreads from falling too fast,” Shlizhyus said. “In Turkey [ruling party of President Recep Tayyip Erdogan] AKP losing some important towns in municipal elections last Sunday was mildly positive news for the market, so prices inched higher too. We believe that a defeat of President Erdogan’s AKP party in a few major towns may trigger positive policy re-adjustments though a risk of ‘heavy hand’ approach still remains intact. Therefore any rally on TR Eurobond market may be short-lived unless we see more positive changes in the coming weeks.”