A Constructive Thesis for Ukrainian Debt

Research evidence excerpt

A Constructive Thesis for Ukrainian Debt

Goldman Sachs CEEMEA Economics Analyst

Global credit markets have rallied sharply in recent months across EMs and DMs in

sympathy with a strong global economy and supportive risk sentiment. This has

extended to distressed sovereign credits including Ukraine (with bond prices up 50% in

the past year), despite the fact that the country’s economy and public finances continue

to weaken in light of the ongoing war with Russia.

Our cautious macroeconomic outlook for Ukraine implies that fiscal risks may increase

further. We previously argued that market pricing of peace deal odds and the country’s

growth outlook was overly optimistic, with the clearest implication being a negative view

on Ukraine’s contingent GDP-linked B bonds, a view that we maintain. However,

investors in Ukrainian debt are squarely focused on sovereign liquidity and restructuring

risks that have diminished in recent months, thanks to large-scale EU and other

official-sector funding for the country that is now largely assured through 2028.

Against this backdrop, we estimate the market-implied probability (derived from bond

pricing and scenarios) that Ukraine will restructure its sovereign debt once again

following the 2022 default, and compare this to our analysis of a ‘fair’ default probability

(based on our assessment of market participants’ central scenarios). We conclude that

there is moderate upside to Ukrainian bond prices, as well as limited downside risk under

most alternative assumptions. While somewhat counterintuitive in the context of a

weakening fiscal outlook, the key underpinning for this constructive thesis on Ukrainian

debt is that the broad rally in global credit markets supports further upside and limits

downside.