Further cooperation with IMF more important for Ukraine than return to debt market
Ukraine's return to the international bond market reduces refinancing risk and boosts reserves, supporting the country's sovereign credit profile, but official lenders (chiefly the IMF) remain the cornerstone of both Ukraine's external financing and its commitment to reform, according to a report on the website of Fitch Ratings.
"Ukraine (B-/Stable) raised $3 billion of 7.375% 15-year bonds on September 18 in its first international issue since the crisis triggered by Russia's military intervention in 2014 and Ukraine's subsequent debt restructuring. The issue attracted orders of $9.5 billion from around 350 investors, according to the Ministry of Finance," reads the document.
"The strong demand highlights the progress the Ukrainian authorities have made in correcting economic imbalances and strengthening the country's macroeconomic policy framework. The deal reduces refinancing risk as a portion of the proceeds will be used to repurchase $1.6 billion of notes maturing in 2019 and 2020. And it will further increase reserves, which had climbed to $18 billion in August from $15.4 billion in January, partly due to the latest IMF disbursement ($1 billion following the conclusion of the program's Third Review in April), the second instalment of the EU Macro-Financial Assistance Program of EUR600 million, and sales of FX by residents," Fitch experts said.
"Sustained bond market access would improve external financing flexibility, but until Ukraine has re-established a track record of issuance, multilateral and bilateral support will remain the key source of balance-of-payments and budget financing. Fitch does not anticipate a strong pick-up in FDI inflows in 2017-2018, leaving official disbursements (mostly from the IMF) to provide the bulk of net external financing," according to the posting.
"We believe that the IMF program also underpins the confidence and reform momentum that supported Ukraine's bond market return and helps ensure support from other official sector creditors. Further disbursements under the Extended Fund Facility will depend on the government's structural reform efforts. The government has indicated that it wants to move swiftly on pension and land sales, both key IMF reform benchmarks," the experts stated
"But reform fatigue and delays in execution present risks, particularly as the emphasis shifts towards introducing and sustaining politically and socially sensitive reforms such as gas tariff adjustments. Meeting deficit targets (2.5% of GDP in 2018 and 2.3% in 2019) will probably require additional measures due to spending pressures, notably from pension transfers and wages," the report reads.
"We think the government remains committed to reform, and the IMF has shown flexibility in its program assessments (Ukraine completed just five of 14 structural benchmarks for the Third Review). However, maintaining momentum in areas such as privatization and tackling corruption may prove challenging, as highlighted in recent comments by IMF official David Lipton to the Ukrainian press. The approach of the 2019 elections may also weigh on reform momentum," Fitch stated.
"Given the importance of multilateral support, our sovereign rating assessment is focused on the credibility and consistency of Ukraine's policy framework, sustained strengthening of external buffers, and progress of reforms intended to improve macroeconomic performance (most notably growth prospects) and to cement fiscal consolidation, in line with Ukraine's IMF program targets," Fitch summarized.