The Economy Ministry said in January it plans to sell as much as $1 billion in foreign-currency debt next quarter, its first international sale since June 2007. Ukraine needs to finance a budget deficit of about 13 percent of gross domestic product and cover $500 million in domestic debt coming due in April.
Half a decade after the Orange Revolution, the former Soviet republic doesn’t have enough funds to stay afloat without emergency relief. The International Monetary Fund has shelved its $16.4 billion loan since November after Ukraine’s Cabinet was unable to commit to budget cuts, and the Feb. 7 presidential election has yet to end the political unrest that’s crippled the economy.
The Eurobond sale “will only be possible with an IMF program in place,” Oliver Weeks, an economist at Morgan Stanley in London, said in an e-mailed reply to questions. “Without the IMF monitoring or some sign it’s imminent, I don’t think investors will have enough confidence the fiscal position is getting back on a sustainable path to lend at reasonable commercial rates. There is always some price you can borrow at, but I think in this case it would be too high.”
Political Powerplay
President-elect Viktor Yanukovych’s party has said it wants to topple Prime Minister Yulia Timoshenko’s government and is preparing a no-confidence vote this week.
If Yanukovych’s allies succeed, they’ll have about a month before the planned debt sale to form a new Cabinet and agree on budget cuts that the current administration has been unable to pass since October. If it fails to regain IMF favor by April, Ukraine may be without external funds until autumn.
“If Yanukovych can’t get a parliamentary majority to oust Timoshenko, he’ll have to call elections, which might be held in September,” said Andriy Nesteruk, an analyst at Kiev-based Phoenix-Capital investment bank. “If that happens, the IMF won’t return to Ukraine until October.”
Morgan Stanley’s Weeks said that even without a parliamentary election, the IMF program probably won’t be resumed until summer.
“We don’t have money to cover our state budget gap,” Nesteruk said. “We have significant budget problems, the situation is close to catastrophic.”
‘Tight’ Outlook
Ukraine’s debt is the third most expensive in the world to insure after Argentina’s and Venezuela’s, according to credit default swap spreads. The five-year CDS contract rose 6 basis points last week to 977, signaling a heightened perceived credit risk. The yield on the existing Eurobond, which matures in 2016, has risen 12 basis points since the election, and was trading 2 basis points higher at 10.57 percent at 1:57 p.m. in Kiev.
“Investors don’t like uncertainty,” Frank Gill, a credit analyst at Standard & Poor’s Ratings Services in London, said in an e-mailed response to questions. “The outlook for financing in 2010 continues to be tight.”
S&P rates Ukraine’s foreign currency debt CCC+, seven levels below investment grade. Moody’s Investors Service ranks Ukraine’s debt B2, five notches below investment grade, while Fitch Ratings grades the country’s credit B-, the sixth-highest junk grade.
“It’s probably not the best time for them to be borrowing,” said Ian McCall, Director of Argo Capital Management Ltd in London, which manages about $500 million in emerging market debt. At the same time, McCall said, with lenders enjoying great leverage, “for us as investors, that can be one of the most interesting times to be lending to a sovereign.”
‘The Other Way’
Before the election, CDS swaps had eased from 1,232 basis points at the beginning of the year to 949 basis points on Jan. 18, one day after the first round of the election that ousted President Viktor Yushchenko.
“The market had rallied back on the expectation of an IMF deal,” said Timothy Ash, head of emerging market research at Royal Bank of Scotland Plc in London. “They will need to clarify the situation with the IMF pretty soon or we could see the market going the other way.” The government won’t be able “to fund the state budget deficit without IMF financing.”
The lack of funds is unlikely to trigger a sovereign default, economists said. Without external financing, the government can cover domestic debt obligations by asking the central bank to print money, though that would fuel inflation. Consumer prices rose an annual 11.1 percent last month, compared with a peak of 31.1 percent in May 2008, according to the State Statistics Committee in Kiev.
Ukraine can also finance its next payment for Russian gas, due on March 7 for February consumption, through a procedure approved by the IMF last year: It deposits Treasury notes at the central bank, the bank converts them into foreign currency from international reserves, and the currency is used to pay for the gas.
‘A Bit Dangerous’
The country can survive until September without IMF help, according to Dmitry Gourov, a Vienna-based economist at UniCredit CAIB AG, a unit of Italy’s biggest bank. “It’s September when the level of reserves would become a bit dangerous,” he said.
Gourov estimates the government would only be able to attract investors to an international bond sale without the IMF program back on track if it offered about 10 percentage points more in interest than investors would be willing to accept with the Fund monitoring the country’s finances.
That rate of interest hasn’t been announced, though Deputy Finance Minister Ihor Umanskyi said on Jan. 27 Ukraine expects to pay a “one-digit” interest rate on the borrowing.
The country’s gross international reserves stood at $25.3 billion at the end of January, according to central bank data.
Ukraine’s economy contracted an annual 7 percent last quarter, the statistics office said yesterday, bringing the average decline last year to about 15 percent.
With assistance from Denis Maternovsky in Moscow, Agnes Lovasz in London and Halia Pavliva in Kiev. Editors: Tasneem Brogger, Chris Kirkham.
Source:businessweek.com/
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