ASSESSMENT OF THE DEBT CAPACITY OF UKRAINE'S REGIONS AND THE POTENTIAL OF THE MUNICIPAL AND GREEN BOND MARKET

Abstract

Financing Ukraine's recovery cannot rest exclusively on central government resources and external grants, which makes the measurement of subnational borrowing capacity an urgent research task. The purpose of the article is to develop and test a methodology for assessing the debt capacity of Ukrainian territorial communities and regions and, on this basis, to estimate the capacity of the potential market for municipal and green bonds. The study distinguishes three concepts: normative debt capacity, determined by statutory budget constraints; realisable capacity, which remains once the range of eligible borrowers, their creditworthiness and administrative capacity are taken into account; and market capacity, the share that can be intermediated through securities rather than bank or sub-loan arrangements. Two statutory limits are formalised: the debt stock ceiling of 200 per cent of average annual development budget revenues, and the debt service ceiling of 10 per cent of general fund expenditure, capitalised into an equivalent debt stock by means of an annuity factor. The comparison shows that the binding constraint is the stock limit, while the debt service limit remains unused by a factor of two to three. The bottleneck is therefore not solvency but the narrowness of the development budget revenue base, which implies that liberalising debt limits would be ineffective, whereas reforming the revenue structure of the development budget would not. Aggregate normative capacity is estimated at UAH 80–160 billion, or some 1.0–2.0 per cent of GDP; realisable capacity at UAH 25–80 billion; and the municipal bond market at UAH 3–8 billion of annual primary placement, with the green segment at UAH 1.5–5 billion and potential growth to UAH 10–15 billion. These volumes are comparable with the pre-war level of local borrowing but marginal relative to recovery needs. It is argued that municipal bonds cannot become the principal channel for financing reconstruction, yet can serve as an instrument of co-financing that raises the leverage of grant and guarantee support and imposes market discipline on local financial management. The key constraints are institutional rather than fiscal, so priority belongs to pooled financing arrangements, credit enhancement, standardised community financial reporting suitable for credit risk assessment, and a verification system compatible with the European green bond standard.