Trade in Securities on the Rise

The PFTS (First Stock Market Trade System) association has summed up the development of Ukraine’s organized stock market over the past three quarters. It was announced that the market has processed more than 4 billion hryvnias since the beginning of the year — not a bad result at all. Yet, it is only 8% of the total turnover of securities in this country. The rest of operations run outside stock exchanges, i.e., essentially in the shadow. Parliament is now drawing up a draft law on “legalizing” the market. PFTS, this country’s most popular stock trade facility, should be expected to welcome the intentions of people’s deputies, but it turned out to be not so simple. “Administrative pressure is not a market instrument. You can force everybody to enter the stock exchange, but the market won’t benefit from this. No matter how often you tug at the carrot top, it will not grow faster,” PFTS president Iryna Zaria believes. In her view, the state should work out a system of incentives to bring deals onto the organized market. As of today, the PFTS president claims, it is far simpler and more gainful to work outside the stock exchange rather than on the organized market.

The structure of this country’s stock market has somewhat changed in the past three quarters. While governmental bonds make up, as always, the lion’s share of the organized market, corporate bonds have made a real breakthrough, with the deals made through them having risen 4-fold up to 422 billion hryvnias. This means that such a classical stock market instrument as shares was pushed to the third place in terms of volume.

Now the Ukrainian stock market has braced itself for a new issue of government bonds with which the Ministry of Finance hopes to solve the budgetary problems. The government reportedly needs 2.5 billion hryvnias. The market is prepared to furnish these funds — desirably at an interest rate of 12- 14% p.a. PFTS board chairman Borys Tymonkin is quite optimistic about Cabinet of Ministers’ chances to raise these funds: “At 14%, borrowers just storm the banks; at 13%, they willingly borrow, and at 12%, they think it over. I guess that even if the government offers its securities at 11-12%, the market will accept them.” Besides, according to Mr. Tymonkin, the price of securities will depend on the term of their validity. The baker also doubts that such a large order can be really made before the year end: in all probability, it will be divided into several installments.

PFTS believes that the issue of a large number of government bonds on the stock market will hardly affect the corporate bond segment because the latter are more gainful. Now even the largest companies issue their corporate bonds at 20-25% per annum. The total value of Ukrainian commercial banks’ free resources — 4 billion hryvnias — is expected to suffice for all. In reality, banks now have excessive money and lack attractive instruments for placing it.

The secondary market of corporate bonds could be such an attractive instrument which is in fact absent in today’s Ukraine. Ms. Zaria is sure this is a temporary phenomenon: “In general, it is clear to us what should be done to increase secondary-market liquidity. We are still waiting for chief lead-managers and issuers to understand that creating a corporate bond market will make it cheaper to issue money.”

Meanwhile, the shares market of Ukraine is still in stagnation. The owners of Ukrainian companies are still wary of attracting investments by waiving some of their property rights to sell a part of their shares on the stock exchange. It is typical, though, of the early stage of stock market development.

Interestingly, the mounting political tension in this country has no effect on the activity of securities trade. “What are we to be afraid of? We live in this country,” Mr. Tymonkin explains to us. In his opinion, domestic political developments have more effect on the strategy of foreign investors, but they often take a too simplistic approach and assess what is going on in Ukraine wrongly.

In general, the Ukrainian stock market is gradually maturing and boldly following the path already laid by Russia, Kazakhstan, and other neighbors. Lagging behind them, Ukraine can still apply their most successful finds to its own market and avoid the errors made by the neighboring markets. Judging by the passivity of state regulation on the stock market, the latter will develop along the same lines in the nearest future.