Ruble Sovereigns: Еxisting Market Capacity Not Very Big

The Russian Finance Ministry is very close to setting a new quarterly record in terms of primary OFZ placement. To beat the previous one, the government needs to raise about R12 bln during the next two auctions days. However, even a successful second quarter is not enough to cover all the financing needs of the authorities, which are increasing due to the complicated economic situation after the COVID-19 outbreak. To remind, currently the issuance program is set by the budget at R2.4 trln (gross), but it is likely to grow to R3.4-3.9 trln (gross), according to discussions among officials. At large, there are two groups of investors, which may show enough demand to help the Finance Ministry to execute issuance program in full. The first one is local commercial banks and the second one is foreigners. The demand of the former may be boosted by launching a long-term REPO facility with the CBR, while the potential demand of the latter is questionable. However, if domestic demand, for any reason, is not sufficient to cover the funding needs, the government may use the residuals on its Treasury accounts (about R4 trln as of beginning of March) to finance the deficit without spending extra money from the National Wealth Fund.

--- The average weekly placement of OFZs has been close to R100 bln since early April and the aggregate amount of issuance in 2Q20 may approach R1 trln.

--- The net amount of government debt issuance for the rest of the year should equal about R2.2 trln (in case of the borrowing program is increased), which looks ambitious as authorities were able to place only R827 bln YTD.

--- CBR will launch 1year REPO facility next week. The cost of the loan will be floating and equal to the key rate plus 25 bps. GKEM Analytica expects the CBR key rate to be lowered by another 125 bps to 4.25% until the year end, which means that rate for 1-year REPO may drop to 4.5%.

--- GKEM Analytica estimates that the additional demand for OFZ from launching the long-term REPO facility may reach R500-700 bln in 2020.

--- Rebalancing of one of the major indices for EM local currency sovereign bonds assumes contraction of OFZs’ weight in the portfolios of international investors by around 10% during 2020. If so, foreigners may express less interest to purchase ruble sovereigns once the CBR rate cut cycle is over.

GKEM Analytica reports have become paid starting Jan 1, 2020. To receive full-text report, please contact us at research@gkem-analytica.com