After several weeks of sessions in March 2014 in Ukraine’s capital Kiev, the International Monetary Fund (IMF) has announced that it has achieved a staff level agreement on an economic reform programme, which will unlock USD27bn for Ukraine for the next two years. The IMF will provide USD14-18bn of that amount. First, the agreement must be approved by the IMF’s management and executive board. The approval is planned for April.
The IMF requires reforms in the following areas: monetary, fiscal and exchange rate policies, financial and energy sectors, governance, transparency and the business climate. The key factors in monetary policy must be a flexible hryvnia and inflation targeting by the National Bank of Ukraine (NBU) over the next 12 months. The financial sector reforms call for banks to be well-capitalised, for the supervisory and regulatory framework of the NBU to be updated to international best practice standard and ‘facilitating the resolution of non-performing loans in the banking sector’. Fiscal policy reforms are intended to trim down the fiscal deficit to 2.5% of GDP by 2016. In Q3 13, Ukraine’s state budget balance saw a 3.4% deficit of GDP. A key factor of energy sector reforms will be moving to full cost recovery in retail gas and heating tariffs. The programme will also deal with Naftogaz, Ukraine’s national oil and gas company, improving its transparency and efficiency. Ukraine must also adopt a new procurement law to improve competitiveness.
Before the agreement was achieved, the Ukrainian government had already indicated that gas tariffs will be raised by 50% from 1 May 2014 and utility tariffs hiked from 1 July 2014. The government has also announced that budget spending will be reduced by 15% in 2014. The hryvnia has been under significant pressure following street protests in the capital in late 2013 and has suffered a 35% devaluation against the US dollar year to date. The NBU tried to support the currency, spending several billions of US dollars from its FX reserves, but then let it fall more or less freely. As the current account deficit remains around 9% of GDP, there is tremendous pressure on the hryvnia. Thus, we expect further devaluation this year when another 35% fall against the US dollar is possible.
After the IMF announced the agreement, Ukraine’s sovereign bonds gained and yields fell. The EU strongly supports the agreement, saying that its Ukraine aid will await the IMF Board decision in April. Thus, if positive, we may see more funds from the EU further supporting Ukraine’s sovereign bonds. However, political risks weigh as presidential elections are due to be held on 25 May 2014.
Ukraine’s sovereign outstanding debt in 2014 is around USD6.2bn, of which USD733m is due to be paid before May 2014. The country’s finance ministry estimates 2014 debt payments will rise to USD10bn. In 2015, around USD9bn of sovereigns are due to be paid.
The IMF requires reforms in the following areas: monetary, fiscal and exchange rate policies, financial and energy sectors, governance, transparency and the business climate. The key factors in monetary policy must be a flexible hryvnia and inflation targeting by the National Bank of Ukraine (NBU) over the next 12 months. The financial sector reforms call for banks to be well-capitalised, for the supervisory and regulatory framework of the NBU to be updated to international best practice standard and ‘facilitating the resolution of non-performing loans in the banking sector’. Fiscal policy reforms are intended to trim down the fiscal deficit to 2.5% of GDP by 2016. In Q3 13, Ukraine’s state budget balance saw a 3.4% deficit of GDP. A key factor of energy sector reforms will be moving to full cost recovery in retail gas and heating tariffs. The programme will also deal with Naftogaz, Ukraine’s national oil and gas company, improving its transparency and efficiency. Ukraine must also adopt a new procurement law to improve competitiveness.
Before the agreement was achieved, the Ukrainian government had already indicated that gas tariffs will be raised by 50% from 1 May 2014 and utility tariffs hiked from 1 July 2014. The government has also announced that budget spending will be reduced by 15% in 2014. The hryvnia has been under significant pressure following street protests in the capital in late 2013 and has suffered a 35% devaluation against the US dollar year to date. The NBU tried to support the currency, spending several billions of US dollars from its FX reserves, but then let it fall more or less freely. As the current account deficit remains around 9% of GDP, there is tremendous pressure on the hryvnia. Thus, we expect further devaluation this year when another 35% fall against the US dollar is possible.
After the IMF announced the agreement, Ukraine’s sovereign bonds gained and yields fell. The EU strongly supports the agreement, saying that its Ukraine aid will await the IMF Board decision in April. Thus, if positive, we may see more funds from the EU further supporting Ukraine’s sovereign bonds. However, political risks weigh as presidential elections are due to be held on 25 May 2014.
Ukraine’s sovereign outstanding debt in 2014 is around USD6.2bn, of which USD733m is due to be paid before May 2014. The country’s finance ministry estimates 2014 debt payments will rise to USD10bn. In 2015, around USD9bn of sovereigns are due to be paid.
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