Ukraine VAT Bonds Will Trade on Market, Tigipko Says

Ukraine will allow bonds issued to cover value-added tax reimbursements to trade on the secondary market, Deputy Prime Minister Serhiy Tigipko said.

The bonds, with two- to three-year maturity, will also be eligible to be used in refinancing transactions with the central bank, Tigipko said in an interview in Kiev today. Ukraine plans to sell as much as 20 billion hryvnia ($2.5 billion) of the bonds this year, including as much as 3 billion hryvnia in the first tranche, he said at a press conference later today.

“There will be no limitations,” Tigipko said. “The bonds will be circulating on the secondary market and will be accepted for refinancing by the central bank.”

The International Monetary Fund, which is helping finance the country with an emergency loan, has urged the government to pay about 25 billion hryvnia of withheld reimbursement to companies. Ukraine plans to borrow $3 billion abroad this year to cover the state budget gap, not including bailout funds, Tigipko said today.

The hryvnia traded at 7.9450 per dollar at 9 p.m. in Kiev, compared with 7.9263 late yesterday. Ukraine raised 3.3 million hryvnia in an April 13 sale of domestic debt, including six- month bonds yielding 15 percent, compared with 11.42 percent on March 30.

‘Overcrowding the Market’

“This will negatively affect the attractiveness of ordinary government bonds by overcrowding the market,” Alexander Pecherytsyn, an ING Groep NV economist in Kiev, wrote in a note to clients today. “The government will have to offer investors more attractive yields on ordinary government bonds offered through the primary market.”

Ukraine expects “strong” demand for the VAT bonds, because the government will focus on foreign borrowing, rather than domestic debt, to finance this year’s budget gap, Tigipko said. Seven foreign banks have offered Ukraine loans, he said, without elaborating.

The government is working to resume cooperation with the IMF after a six-month freeze triggered by the previous government’s failure to cut spending and adopt the 2010 budget before the January presidential elections. Ukraine will probably be able to use $4 billion to cover this year’s deficit, Tigipko said, without estimating the total amount of the loan.

Kateryna Choursina and Daryna Krasnolutska
Source: Bloomberg