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The amounts of placement of government issued bonds in hryvnia on the primary market in January-July 2021 (UAH 178.2 billion) increased 1.6 times compared to the previous year. But this year the government has attracted 29% less funds to the budget from the placement of government issued bonds in foreign currency (USD 2.3 billion) than in January-July 2020.

The key trends in the government issued bonds market this year have been:

  • a high level of nominal interest rates (10.9 – 11.6% per annum) and a slight decrease in real interest rates compared to the previous year;

•  a significant gap between the average nominal rate of government issued bonds and the NBU key policy rate and a positive gap between government issued bonds rates and time deposits of banks;

•  the semi-closed market for individuals (their share was less than 2%) with the dominance of Ukrainian banks on the market (with a share of 50.2%) and increased role of non-residents.

Figure 1 shows volumes of placement of government issued bonds in hryvnia, the level of their nominal and real yield on a monthly basis in January 2017 – July 2021.


 – volumes of placement of government issued bonds, billion UAH (left scale)
*           – nominal yield of government issued bonds, % per annum (right scale)
– real yield of government issued bonds, % per annum (right scale)
Figure 1. Volumes of placement, nominal and real yield of government issued bonds in hryvnia in January 2017 – July 2021
Source: Compiled and calculated by the author based on National Bank of Ukraine

As we can see, in 2021 the largest borrowings in the domestic market were made by the government in January and June, when the monthly placements of government issued bonds amounted to UAH 36.2 and 37 billion. Though such volumes were significant, they still lagged behind the peak values ​​of December 2020 (UAH 87.8 billion) and May 2020 (UAH 41.8 billion).

Nominal yield of government issued bonds in hryvnia in January–July 2021 increased by 1.5 percentage points compared to the average yield in 2020 and reached 11.3% per annum. The weighted average nominal rate of the primary market for seven months did not fluctuate significantly. Some rise in yield in 2021 compared to 2020 was due to higher inflation risks and an increase in the NBU key policy rate. But the chronically high level of interest rates of government issued bonds reflects the relevant public policy, which has long been pursued in the interests of Ukrainian and international financial capital.

If in many countries real interest rates of government bonds are negative, in Ukraine the real yield of government issued bonds in hryvnia in January–July 2021 ranged from + 3.3% to + 5.3% and averaged +3.9% per annum. This level was 1.1 percentage points lower than the average for 2020. That is, as inflation rose, the nominal yield of government issued bonds increased, and the real yield, on the contrary, decreased (although it remained abnormally high). Such dynamics is natural for the period of accelerating inflation, when inflation rates gradually transfer to nominal interest rates. But real interest rates may be reduced for some time (until the full inclusion of the inflation component in nominal rates).

In 2021, there was an unnatural relationship between the level of nominal rates of government issued bonds and the level of the NBU key policy rate. Figure 2 shows the dynamics of the NBU key policy rate, interest rates on time deposits of banks and the weighted average rate of government issued bonds in 2020–2021.


*         – key policy rate of the NBU
*        – interest rate on term deposits in hryvnia, 
*        – weighted average interest rate on government issued bonds
 – difference between interest rate on government issued bonds and
key policy rate 
Figure 2. Dynamics of key policy rate of the NBU, interest rate on term deposits, average interest rate on government issued bonds and difference between key policy rate and interest rate on government issued bonds
Source: Compiled and calculated by the author based on National Bank of Ukraine

It is significant that in 2019 – the first quarter of 2020 the interest rate on government issued bonds was lower than the NBU key policy rate, but since April 2020 the rate on government issued bonds exceeded the NBU key policy rate, and over time, this gap has only deepened. From May to December 2020, the difference between the average rate of government issued bonds and the NBU key policy rate was in the range of 2.1–3.6% per annum. In December, the government’s sharp rise in nominal rates on government issued bonds increased this difference to 5% per annum, reaching a peak of 5.5% in February 2021. Since then, the gap between the two rates has narrowed, but insignificantly: in July 2021, it was 4.1% per annum.

Another significant event in the financial market of Ukraine over the last year was the anomalous ratio between the interest rate on term hryvnia deposits of banks and the rate on government issued bonds. If until November 2020 the deposit rate was higher than the government issued bond rate, then in November the latter rate exceeded the deposit rate. In December 2020, there was already a huge gap between the two rates, and this year it has deepened even more, reaching 4.2% per annum in June-July 2021 (see Figure 2).

These changes in the levels of interest rates and the ratios between different types of rates indicate unhealthy trends in the financial market of Ukraine and failures in the transmission mechanism of monetary policy. Under normal conditions, the rates on government bonds, although exceeding the key policy rate of the central bank, but insignificantly, because they are close in the transmission mechanism. In contrast, interest rates on time deposits of banks operate in the final stages of monetary transmission and are usually much higher both than the key policy rate of the central bank and than rates on government bonds. In Ukraine, as we have shown, among the three types of rates, the rate on government bonds is the highest, and its gap with the key policy rate of the NBU is unreasonably high; and a higher level of rates of government issued bonds compared to time deposit rates is irrational.

Hypothetically significant lag of the NBU key policy rate from the level of government issued bonds rates could be explained by a change in the government issued bonds maturity and an increase in long-term bond issues. Indeed, the share of medium-term issues increased, and the share of short-term bonds in primary government issued bonds placements decreased from 72.4% in 2020 to 27.5% in January-July 2021. However, along with the mentioned rise in the gap between the average government issued bonds rate and the key policy rate, there was also an increase in the gap between the short-term government issued bonds rate and the key policy rate.


* – difference between average interest rates on government issued bonds and key policy rate
 – difference between short-term interest rates on government issued bonds and key policy rate
Figure 3. Dynamics of the difference between interest rates on government issued bonds and key policy rate of the NBU in 2020-2021
Source: Compiled and calculated by the author based on National Bank of Ukraine

The data in Figure 3 show that the difference between the short-term government issued bonds rate and the NBU key policy rate increased from 1.7% per annum in July 2020 to 4.7% per annum in December and has been unnaturally high since then. Only in May-June 2021 this difference temporarily went down (to 1.3–1.2% per annum), but in July it went up again to 3.2%.

As for bank deposit rates, on the one hand, their decrease in 2021 is partly explained by excess liquidity and was quite predictable as banks’ needs to attract resources reduced. But, on the other hand, the simultaneous synchronous growth of government issued bonds rates seems illogical. Why does the excess of resources in banks not put pressure on the government issued bonds market and not decrease interest rates on government bonds by analogy with bank deposit rates?

Obviously, there is a factor of interest of certain circles in the high yield of government issued bonds and in financing the excessive appetites of “investors” at the expense of budget funds. Artificial restrictions on participation of retail investors in government borrowings and the direct sale of government issued bonds at primary auctions only to primary dealers should also be added to this. Such factors constrain competition in the market and create opportunities for interest rate manipulation.

The ratio of interest payments on public debt to GDP indicates high interest rates on debt in Ukraine. In Ukraine, this indicator in 2019-2020 was 3% of GDP, while in emerging market and middle-income countries – only 1.9% of GDP. That is, in Ukraine, with an average level of debt burden, the relative value of interest payments on debt is 1.6 times higher than the average in countries with a similar level of development. It is significant that the costs of servicing the domestic debt (interest payments on domestic debt) in Ukraine in the first half of 2021 increased by UAH 9.4 billion compared to the first half of 2020.

Thus, the above statistics indicate anomalies in the financial market of Ukraine, the probable reasons for which are the active involvement of lobbying and political factors in the government issued bonds market, and unequal conditions for different categories of investors.

In the structure of the base of investors in government securities in January-July 2021, the following important changes took place: the share of Ukrainian banks (excluding the NBU) decreased from 51.9 to 50.2%; the share of legal entities of Ukraine went down from 5.8 to 4.9%; the share of foreign investors increased from 8.5 to 10.7%; and the share of individuals went up from 1.1 to 1.9% (see Figure 4).


*          – National Bank of Ukraine
*        – Banks
*          – legal entities
*        – individuals
 – non-residents
Figure 4. The structure of the base of investors in government issued bonds as a % to total portfolio in 2020-2021
Source: Compiled and calculated by the author based on National Bank of Ukraine

The amount of government debt to foreign investors for government issued bonds in January-July 2021 increased by UAH 21.2 billion to UAH 105.6 billion. Foreign capital flows had a certain impact on exchange rate fluctuations.

In January-July 2021, investments of individuals in government issued bonds increased by UAH 7.8 billion (to UAH 18.8 billion). However, they were only 0.4% of GDP. In international comparison, this level of participation of individuals is very low. For example, in Poland this figure is 1% of GDP, in Italy – 5.1%, in Ireland – 6.8%, in Hungary – 14.5%, in Portugal – 15% of GDP. The Ukrainian phenomenon is explained by the reluctance of the responsible authorities to implement an adequate tool for retail investors, strict requirements for financial monitoring, and high transaction costs when individuals use standard schemes for purchasing government issued bonds.

Banks of Ukraine reduced their government issued bonds investment portfolio by UAH 20.9 billion to UAH 493.6 billion. This reduction was mainly due to foreign currency government issued bonds, which is explained both by the NBU’s strict requirements for assessing the risks of banking transactions with foreign currency government issued bonds and their low yield. In the first half of 2021, the average cost of government borrowings in foreign currency in the domestic market was 3.8% in dollar and 2.5% in euro instruments. This cost was significantly lower than the cost of borrowings in foreign markets, as the government placed eurobonds at a rate of 6.875% per annum.

In fact, the potentially significant demand for foreign currency government issued bonds has been constrained by their low yields and the administrative constraints set out in the Memorandum with the IMF. On the other hand, investors in Ukraine’s eurobonds received artificial advantages over domestic investors in the form of higher interest rates. Such policy, in addition to significant losses to the budget, worsened the balance of payments of Ukraine.

Taking into account the high cost and unstable access to external market borrowings, the government should raise the issuance of foreign currency government issued bonds, slightly increasing their yield. It is also important to restore sound proportions in the financial market of Ukraine by reducing the real interest rate on hryvnia government issued bonds to 0-1% per annum and strengthening the competitive principles of the market. The implementation of these proposals requires mainly simplification of the conditions of access to the market for retail investors and modification of the system of placement of government issued bonds through primary dealers.

Doctor of Economics, Scientific Director at the Growford Instittute Tetiana Bogdan for “Dzerkalo Tyzhnia”.