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Week's balance: Ukraine issues bonds worth EUR 1 billion, inflation shows rise, while Constitutional Court alters status of energy regulator

16:40, 17.06.2019
6 min.

Ukraine for the first time in fifteen years issued euro-denominated bonds, the State Statistics Service reported accelerating inflation, the Cabinet approved Ukrzaliznytsia's development strategy until 2023, and the Constitutional Court caused a storm with its decision to recognize unconstitutional a number of provisions of the law on the energy regulator – these are economic news of the past week.

The most important event of the past week was the placement by Ukraine on foreign borrowing markets government bonds in the amount of EUR 1 billion with a yield of 6.75% per annum. For the first time in the last fifteen years, our country entered the market with debt securities denominated in euros rather than dollars.

Comparing with last year, when Ukraine in late October issued two series of Eurobonds in dollars at 8.994% and 9.75%, we are clearly seeing progress now.

According to Finance Minister Oksana Markarova, the news is strategic in the context of European integration of Ukraine, as well as against the background of increasing exports of domestic products to EU countries and a significant increase in cash flows in euros.

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The Ministry of Finance also added that during the placement, Ukraine received bids for the purchase of Eurobonds of a new issue of about EUR 6 billion. Thus, if the country again wants to attract the money of creditors in a similar way, no particular problems should arise. So the likelihood of the Ministry of Finance re-entering the foreign borrowing market by the end of the year is quite high.

The expert community reacted positively to the news on the Eurobond placement. In a comment to UNIAN, Head of the analytical department at Concorde Capital, Oleksandr Parashchiy, noted that for a country with a credit rating like Ukraine has the state attracted funds at a very good rate. "First of all, ratings affect the rate. There are simply no sovereign issues in euros with such a low rating, and in this case, it is very difficult to bargain with creditors. This means that Ukraine has set the trend. In addition, there are no prices for similar tools, that is, there is nothing to make a start from. And the negotiating position of Ukraine was not the best one because of the upcoming elections, a pause in relations with the International Monetary Fund, a shortage of planned budget revenues, and a high demand for money. The lenders used all this to strengthen their bargaining position," explained Parashchiy.

At the same time, the expert urged not to compare the issue of Eurobonds by Ukraine with the almost simultaneous issue of bonds by Lithuania, which placed 10-year eurobonds worth EUR 650 million at a rate of 0.5% per annum and 30-year bonds worth EUR 850 million at 1.625%. "Lithuania placed 10-year securities at 0.5% in euros, but we are very far from Lithuania. Firstly, they are in the eurozone, that is, for them it is their own currency. Secondly, they have an "A-" credit rating, whereas we have "B-". There is a huge gap between these rankings," he added.

Relentless inflation

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The important news of the past week was the report of the State Statistics Service on the acceleration of inflation in May to 9.6% in annual terms. It is noteworthy that the year-on-year rate was up for the second month in a row, after rising to 8.8% in April.

It is noted that in May, the highest price increase on year was again recorded for vegetables (53%), railway passenger transport (28.2%), road passenger transport (24.4%), sewerage services (23%), and bread (20.2%).

The price reduction was recorded for eggs (30.1%), fruit (12.3%), sugar (2%), and clothes (0.2%).

The National Bank noted that the stats published exceeded its forecast. According to bankers, the acceleration of inflation is due, above all, to the rapid rise in prices for raw food products as a result of their insufficient supply. In addition, fuel prices rose at high rates due to difficulties with the import of energy resources from Belarus and Russia.

The NBU stressed that at the same time, core inflation, as in previous months, was slightly below the forecast – at 7.4% in annual terms.

"The actual inflation rates, in particular, the baseline, indicate that the fundamental inflationary pressure in general is in line with the expectations of the National Bank. However, the overall inflation rate exceeded the forecast trajectory, primarily due to the effect of temporary supply factors," the NBU report notes.

It is also reported that updated estimates of the impact of these and other factors on inflation rates, as well as a forecast of other macroeconomic indicators will be released on July 18. It should be noted that by the end of the current year, the National Bank predicts a slowdown in inflation to 6.3%. Meanwhile, according to the consensus forecast of experts polled by UNIAN, this year Ukraine should expect a slowdown in consumer price growth to 7.2%.

Ukrzaliznytsia's strategic development plan

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Important decisions for the development of the country's economy were brought by the government meeting on Wednesday, most of which was devoted to transport infrastructure. In particular, the Cabinet of Ministers approved the development strategy for the key state-owned company, Ukrzaliznytsia, until 2023.

Yevhen Kravtsov, head of the company's board, noted that in this case, it is not just a strategy of an enterprise or a single industry – it is an important part and continuation of the Strategy for the development of the transport industry of Ukraine until 2030. "We are a stepping stone in the implementation of a larger national transport strategy," he stressed.

As for the priority directions for the implementation of the strategy, Kravtsov singled out as key ones the covering by Ukrzaliznytsia of demand for cargo transportation by Ukrainian enterprises and companies. "Today we have resolved this issue in tactical terms, but to ensure the export of the Ukrainian economy, to ensure the growth of Ukrainian industries, we will be able to ensure the export and transportation of Ukrainian goods both domestically and for exports," he said.

Besides, the strategy is aimed at ensuring the financial and economic stability of the company, attracting investment in the modernization of fixed assets and enhancing security. At the same time, Kravtsov recalled that four years ago, Ukrzaliznytsia was in a state of technical default. To solve strategic tasks, the document sets forth such goals as establishing reasonable tariffs for all types of rail transportation, reorganizing the company into a vertically integrated structure with a powerful corporate sector and sectors for freight and passenger traffic, infrastructure and production, creating conditions for private rail carriers.

Slawomir Novak, head of Ukraine's road management company Ukravtodor, also spoke at the Cabinet meeting on Wednesday. He reported on the work done over the past two and a half years to restore and build new Ukrainian roads and shared his plans for the medium term. According to him, this year, UAH 55 billion will be allocated for road repairs . These will be both budget funds and funds of international financial organizations. Novak noted that Ukravtodor would receive UAH 33 billion of this amount, regional state administrations will receive UAH 14.6 billion on local roads, and a security fund will get UAH 2.1 billion. Among the plans for the current year, he also named the holding this fall a competition for the construction of the first toll road connecting Lviv and Krakovets.

Slawomir Novak / Photo from UNIAN

Prime Minister Volodymyr Groysman instructed Ukravtodor CEO to promptly submit to the government a draft strategy for the rehabilitation and reconstruction of regional roads.

According to Minister of Infrastructure Volodymyr Omelyan, massive repairs of local roads will begin across the country next year. The minister said that the state budget 2020 has to provide an additional UAH 50 billion for this needs.

Another important news of the past week was Zelensky's decision to appoint the ex-Minister of Economy of Ukraine, reformer Aivaras Abromavicius member of the supervisory board of Ukroboronprom, Ukraine's state-owned defense giant. It is quite possible that this is the first step in a large-scale reform of the national defense industry, which, for a number of reasons, cannot fully reach its potential and periodically finds itself part of loud scandals.

Blow at energy regulator

On Friday, the Constitutional Court surprised experts by a resonant conclusion, which, at the request of a group of legislators, declared unconstitutional a number of norms of Law of Ukraine "On the National Energy and Utilities Regulation Commission" of 2016, repealing them from December 31, 2019. Thus, the new Rada will have time until the end of the year to bring the law in line with the Basic Law of the country.

President's representative in the Cabinet of Ministers, Andriy Gerus, told a briefing that the conclusion of the Constitutional Court does not question the legality of decisions previously adopted by the Commission.

"As far as I spoke with lawyers, this decision is not retrospective. It does not concern the past, it concerns the future," he said.

Andriy Gerus / Photo from UNIAN

According to the envoy, the new composition of the Verkhovna Rada should also promptly make changes to the Constitution in order to provide for the work of market regulators.

"In our opinion, this should be regulated by the adoption of a new law on NEURC, where slightly different appointment procedures will be provided. And, secondly, the Constitution should be amended so that the Constitution provides for the existence of various regulators, not only in energy, but also anti-corruption bodies," said Gerus.

This week promises to bring important economic news for the country along with the extreme summer heat. President Volodymyr Zelensky will hold talks with the leaders of France and Germany, the Verkhovna Rada will resume plenary sessions, while the State Statistics Service will publish preliminary data on the gross domestic product for this year's first quarter.

Dmytro Shvarts

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