Investors back Ukraine bond after change at top of central bank

Investors have delivered a ringing endorsement of Ukraine’s new central bank governor, queueing up to buy bonds at the country’s first debt sale since the previous chief abruptly quit three weeks ago.

Kyiv sold $2bn of 12-year debt on Thursday, having drawn more than $6bn of orders, in a deal that came just a week after Kyrylo Shevchenko — the former head of a state-owned lender — took over at the central bank.

His predecessor Yakiv Smolii resigned on July 1, citing “systematic political pressure”, earning President Volodymyr Zelensky’s government a rebuke from the IMF over the potential threat to central bank independence.

The bond priced at a yield of 7.25 per cent, representing a slightly lower borrowing cost than the previous sale, which was scrapped following Mr Smolii’s departure.

Investors said they had been reassured by the IMF’s intervention, as well as a call this week with the new governor, when Mr Shevchenko stressed he would not bow to political interference.

“He gave us the message that it’s business as usual, and that the objectives of central bank policy aren’t about to change,” said Richard House, head of emerging market debt at Allianz Global Investors.

Mr Shevchenko’s first moves as head of the National Bank of Ukraine are being scrutinised by investors. Mr Smolii and members of his board had complained of threats from oligarchs who opposed efforts to clean up the banking sector.

Making its first interest-rate decision under Mr Shevchenko’s leadership, the central bank on Thursday surprised markets by keeping its key policy rate at 6 per cent. Mr Zelensky and his political allies had called on the bank to lower lending rates in order to stimulate growth during the economic crisis caused by Covid-19.

The decision to hold rates was an encouraging early sign that the new governor would resist calls to ease policy faster than necessary, said Viktor Szabo, an emerging market debt portfolio manager at Aberdeen Standard Investments. “If they started to cut more aggressively,” inflation “could be a worry”, Mr Szabo said.

Ukraine’s dollar bonds dropped about 5 per cent in price after Mr Smolii quit, but have recovered, in a sign that the change at the central bank has done little to dampen investors’ enthusiasm for the country’s debt. EM fund managers have flocked to Kyiv’s bonds over the past year, encouraged by their relatively high yields and the market-friendly reforms introduced by Mr Zelensky.

“In normal . . . times you would think they’d have to pay a bit more this time around,” in light of Mr Smolii’s departure, said Allianz’s Mr House. “But there’s huge demand for all things with a yield, especially in emerging markets.”

Mr Zelensky was elected last year on a wave of anti-establishment sentiment among voters. In May, he agreed a $5bn loan from the IMF to shore up Ukraine’s public finances. The Fund this month warned that the lifeline was conditional on preserving the central bank’s independence.


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