Ukraine could stay out of international capital bond markets altogether in 2019 if Kyiv manages to raise enough concessional financing, a senior debt official told Reuters.
Escalating tensions between Moscow and Kyiv, uncertainty over two sets of elections coming up next year in Ukraine and a generally difficult backdrop for emerging markets in recent months have put increased pressure on Ukraine's dollar bonds, Reuters said.
After Russia impounded three Ukrainian navy ships in November, Ukraine's debt yields spiked to more than 10 percent – a level that makes it unsustainable for Kyiv to tap markets.
"Given how markets are in general now, and especially towards emerging market countries, it makes sense for us to prioritise concessional financing," Yuriy Butsa, Ukraine's government commissioner for public debt management told Reuters.
"If we have a significant amount of concessional financing, it may be an option to not issue a eurobond at all," he said, referring to funds from the European Union, World Bank and other bilateral or multilateral lenders.
"We will go to the market when conditions are favourable, but we expect the windows will be much narrower over the course of the next year."
Presidential elections that pitch incumbent Petro Poroshenko against a number of other candidates, including opposition leader and political veteran Yulia Tymoshenko, are scheduled for March 31. Parliamentary elections are due at the end of October.
Ukraine – which passed its 2019 budget on November 23 – plans to borrow around $11 billion in total in 2019, the lion's share from local debt markets, said Butsa.
The European Union already raised 500 million euros this week to lend to Ukraine while a second matching tranche is due before end-June, said Butsa. He expected a $750 million guarantee from the World Bank to be approved on December 18.
If Ukraine did come to the international market in 2019, Butsa expected part of any bond sale to be in euro-denominated issues. While the EU accounts for 38 percent of Ukraine's trade, only 8 percent of its debt is denominated in euros.
"We are also looking at the possibility to do another liability management of the sort we did in 2017 because we have some bigger repayments in 2020 and 2021, so if the conditions are good we can do that next year."
Making local currency securities accessible through Clearstream, an international clearing system owned by German stock market operator Deutsche Boerse, should also increase the share of foreign investors in Ukraine's local markets.
"We expect the Clearstream link to be established in February 2019," said Butsa, adding international investors currently held just 1.7 percent of local currency-denominated bonds, a low figure compared to the likes of Egypt, where the share was around 20 percent.
"So you can see we have a lot of upsides, anything towards that would be good."