Response to the FT article on Ukraine's risk of collapse

The London-based Financial Times published an article today, “IMF warns Ukraine bailout at risk of collapse,” stating that the government will need an extra USD 15 bln within weeks to avoid financial collapse. It prompted a massive selloff of Ukrainian sovereign bonds, which fell more than 6% in price along the whole curve. Although we acknowledge Ukraine’s financial position is quite tenuous, we believe the article exaggerates the situation.

Below we offer our comments to the article’s strongest statements.

FT: “The additional cash needed would come on top of the $17bn IMF rescue announced in April and due to last until 2016. Senior western officials involved in the talks said there is only tepid support for such a sizeable increase at a time Kiev has dragged its feet over the economic and administrative reforms required by the programme.”

Our comment: While we acknowledge the Ukrainian government has dragged its feet, the new Cabinet approved on Dec. 2 made clear it’s committed to austerity measures for 2015, including cutting the budget deficit. It would be an added benefit if IMF funding increases. However, even under the current arrangement, Ukraine will still have nearly USD 19 bln pre-committed funds for 2015 (including USD 12.4 bln from the IMF and USD 6.4 bln from other donors, out of a total program of USD 27 bln as outlined by the IMF for 2014-2015. This should be enough to balance external accounts if IMF cooperation continues smoothly.

The government’s total external debt repayable in 2015 is USD 5.7 bln and it also has USD 1.9 bln in internal foreign currency debt. On top of that, USD 1 bln in quasi-sovereign external debt is due to be repaid (Ukreximbank and City of Kyiv). Corporates might need up to USD 6 bln (we estimate) to partially repay their external obligations. At the same time, Ukraine’s external trade should be more or less balanced in 2015, which amounts to a total demand for dollars to repay Ukraine’s debt in 2015 at USD 15 bln (which is covered by the USD 19 bln in pre-committed funds). Clearly, Ukraine will need some more money to build up its foreign currency reserves and have some safety cushion in case the war extends itself and provokes panic, causing more foreign currency deposit outflows. Therefore, any additional funding is clearly welcomed, but not critical.

Meanwhile, Ukraine’s Economy Minister commented today that Ukraine is in talks with the IMF to extend its program, while declining to provide exact numbers.

FT: “Without additional aid, Kiev would have to massively slash its budget or be forced to default on its sovereign debt obligations. Since the bailout programme began in April, Ukraine has received $8.2bn in funding from the IMF and other international creditors.”

Our comment: Kyiv is already planning to cut its public spending anyway since it’s a precondition for further IMF cooperation. The authorities are well aware they can’t function further without IMF support. By the end of 2014, gross reserves are expected to be USD 7 bln, which is even less than sovereign dollar liabilities in 2015. However, the authorities have made clear they are targeting to comply with IMF requirements on tightening the budget deficit and securing enough funds to cover external liabilities.

FT: “Under IMF rules, the fund cannot distribute aid unless it has certainty a donor country can meet its financing obligations for the next 12 months, meaning the fund is unlikely to be able to send any additional cash to Kiev until the $15bn gap is closed.”

Our comment: The IMF deals with effectively bankrupt countries to help them overcome economic difficulties and to guide them to economic growth. Ukraine is making progress with its economic transformation by hiking heating prices, cutting budget spending, and approving anti-corruption legislation. Although the situation is very tough and the country needs very deep and long-term reforms, Ukraine’s prospects will prove quite positive for the IMF, especially if the 2015 budget deficit is narrowed to 5.8% of GDP, as has been required. In which case, cooperation and subsequent financial support have high chances for success.

Источник: Конкорд Капитал