IMF engagement still key as Ukraine makes macro progress - Fitch
Easing inflationary pressures, moderating economic imbalances and declining debt support Ukraine's sovereign credit profile, but IMF program delays remain a source of uncertainty, Fitch Ratings has said.
"The program is a key factor for sovereign creditworthiness, as it mitigates low external liquidity and reduces refinancing risks," a report on the agency's website reads.
"Increased exchange rate flexibility and monetary policy focused on price stability and prudent banking regulation have helped macroeconomic stability improve. Annual inflation dipped below double digits in June (9.9%) for the first time since September 2016, down from a peak of 16.4% in September 2017. It fell to 8.9% in July, as supply shocks on food prices eased. The National Bank of Ukraine raised its policy rate by 50 b.p. to 17.5% last month, citing risks that inflation would not reach its end-2019 target range (5% plus or minus 1 p.p.), stemming from domestic demand pressures and higher risks related to the IMF program and external financing," it says.
"An improved policy framework was a factor in our sovereign rating upgrade to 'B-'/Stable in November 2016. Ukraine has experienced less volatility than some other emerging markets in 2018, despite its high external financing requirement, due to limited reliance on portfolio inflows as well as reduced external imbalances. The estimated current account deficit reached $613 million in H1, 2018, and we expect a full-year deficit of $3.2 billion (2.7% of GDP). Growth averaged 3.2% in H1, 2018, driven by domestic demand. Reduced exchange rate volatility, fiscal restraint and delays to official and market financing have reduced general government debt, which dropped by 8 p.p. to 61.5% of GDP (or 71.8% including guaranteed debt) last year," Fitch said.
"But low external liquidity is a key sovereign credit weakness. External buffers are weaker than 'B' category peers (forecast at three months of current external payments in 2018). International reserves declined for a third consecutive month in July to $17.75 billion, from a November peak of $18.9 billion, due to public debt repayments," the agency experts stated.
"Exchange rate flexibility and moderate external imbalances should limit near-term balance-of-payments pressures, but the IMF Extended Fund Facility (EFF) is the key to preserving international reserves and meeting rising sovereign debt payments. When we affirmed Ukraine's sovereign rating in April, we expected the fourth review to be finalized in Q3, 2018 and acknowledged the increased risk of delays, which we believe have increased," the document reads.
"Pension reform, an updated privatization bill, and passing a law to set up an independent anti-corruption court, including an amendment to meet international commitments, highlight the government's efforts to finalize the review. The main outstanding issues are potential modifications to the 2018 budget to meet the program's 2.5% of GDP deficit target, and adjusting household heating tariffs," it says.
"Revenue performance improved in Q2, 2018, but expenditure under-execution will probably be required to meet the deficit target. The freeze of residential gas prices was extended in July for one month and discussions on the tariff formula are ongoing, but will be complicated by political considerations, given the approaching heating season and elections due in 2019," according to the report.
"Completing the review would allow the disbursement of the fourth IMF tranche (possibly $1.9 billion), boosting reserves and unlocking other multilateral and potentially market financing. Sovereign external debt amortizations are $1.8 billion for the rest of 2018 and increase to $3.3 billion in 2019 and $3.9 billion in 2020 (including bond repayments of $1.6 billion in September 2019 and $2.4 billion in 2020)," it states.
"Fitch does not expect further disbursements under the current IMF EFF beyond the fourth tranche, as the program is scheduled to end in early 2019. But continuing engagement with the IMF and international partners will be important to sustain macroeconomic stability improvements, limit reform reversals, and secure access to official and market financing," the experts added.