Cash-strapped Ukraine may soon finalise a deal with the International Monetary …
Ukraine may soon sign a longer-term arrangement with the International Monetary Fund (IMF) that would replace the existing stand-by arrangement. It also seems that Kyiv is about to start talks over a sovereign debt restructuring with creditors in order to improve medium-term debt sustainability.
In 2014, the IMF pledged to provide 17 billion dollars for Ukraine over the period of two years. Including funds from other western donors, total financial aid amounted to 27 billion dollars. An economic meltdown was averted last year.
Ukraine faces debt repayments of some 11 billion dollars in 2015, including the 3 billion Russian bond, which come due in December. However, Moscow can demand early repayments, if Ukraine’s debt-to-GDP ratio exceeds 60 per cent. This debt limit has already been breached. If Russia decided to call the bond, other creditors could also demand early bond repayments. That would trigger a default.
In recent days, Ukrainians have seen a sharp escalation of fighting in the country’s eastern regions between Russia-backed rebels and government forces. Infrastructure has been destroyed. A large residential area in Mariupol, a key trade hub, was damaged last week by a rocket attack. Kyiv claims that Russian troops and military equipment, including rocket launchers and armoured vehicles, have crossed the international border to support pro-Russian separatists, who are trying to take over areas vital to the economy such as the port city of Mariupol and Avdiivka, one of Europe’s largest manufacturers of coke for the steel industry. The 10-month conflict has claimed more than 5000 lives so far. A ceasefire agreement that was signed in Minsk last September between Kyiv, Moscow and pro-Russia rebels is all, but dead.
It is estimated that gross domestic product shrank by nearly 8 per cent last year. It is highly likely that the economy would contract in 2015 as well. Inflation rose to nearly 25 per cent in December, up from 0.5 per cent in January. There are reasonable doubts over Ukraine’s solvency.
The country is suffering from capital outflows. Foreign exchange reserves fell to 7 billion dollars at the end of last year, the equivalent of four weeks’ worth of imports cover, as the central bank used those reserves to support the hryvnia currency and paid for natural gas imports from Russia. Bond yields are soaring. The risk of default is high. Government bonds maturing in 2017 plunged to 53 cents on the dollar on January 29th, which is equal to an annual yield of 41 per cent. The cost of insuring Ukraine’s debt against default is one of the highest in the world. The plunge in bond prices may suggest that investors expect some sort of debt restructuring.
Kyiv needs at least 15 billion dollars in external financing on top of 27 billion dollars, which have been already committed, to stay afloat. In early January, Jean-Claude Juncker offered a 1.8 billion euro bailout package for Ukraine (see ‘The European Commission proposes another 1.8 billion euro for Ukraine‘). The German government backed 500 million euro in credit guarantees. On January 13th, the United States also announced that it would provide as much as 2 billion dollars in loan guarantees in 2015. New financial assistance is conditional on Kyiv implementing long-term structural reforms. However, Ukraine needs much more to stay solvent.
photo: U.S. Embassy Kyiv Ukraine / CC BY-ND 2.0