Category Archives: Ukraine crisis

31/5/15: IMF slashes Ukraine Economy Outlook

IMF statement on Ukraine with some pretty ugly forecast revisions.

[Note, emphasis in italics is mine]

"Press Release No. 15/243, May 31, 2015

IMF Statement on Discussions with Ukraine on First Review under the Extended Fund Facility Arrangement

An International Monetary Fund (IMF) mission visited Kyiv during May 12-29 to hold discussions on the first review under the Extended Fund Facility Arrangement (EFF) in support of the authorities’ economic reform program (see Press Release No. 15/107).

At the conclusion of the visit, Mr. Nikolay Gueorguiev, mission chief for Ukraine, made the following statement today in Kyiv:
“The authorities’ commitment to the reform program remains strong. All performance criteria for end-March were met and all structural benchmarks due in the Spring are on course to be met, albeit some with a delay. This good program implementation has been achieved notwithstanding an exceptionally difficult environment, in part related to the unresolved conflict in the East, which took a heavier than expected toll on the economy in the first quarter of 2015.

Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent. Inflation was mostly driven by one-off pass-through effects of the large exchange rate depreciation in February as well as the needed energy price increases.

“In recent months, signs that economic stability is gradually taking hold are steadily emerging. The foreign exchange market has remained broadly stable. Gross international reserves, although still very low, have increased to US$9.6 billion at end-April. Banks’ deposits in domestic currency have been recovering. The budget outturn in the first months of 2015 was stronger than expected, partly due to temporary factors.

“The authorities recognize that decisive implementation of economic reforms is indispensable for entrenching financial stability and restoring robust and sustainable growth. They are committed to advancing fiscal consolidation and energy sector reforms, including further energy tariff adjustments to eliminate the large losses of Naftogaz, reduce energy consumption, and foster energy independence. They are also moving ahead with the rehabilitation of the banking system, and the improvement of the business environment to enhance the productive potential of the economy.

“The authorities are also determined to complete the ongoing debt operation in line with program objectives. This will ensure that public debt is sustainable with high probability and the program remains fully financed, which are requirements for the completion of the review. More broadly, continued financial support for Ukraine’s reform efforts from official and private creditors is vital for the success of the program.”

Let's hope IMF optimism wins over the reality, but just two and a half months ago, the IMF projected gross international reserves for 2015 at USD18.3 billion, and now they are celebrating reserves at USD9.6bn. IMF programme sustainability analysis was forecasting real GDP decline of 5.5% in 2015 - not 9% decline the Fund now projects. See: for more details.

One has to wonder, just how 'flexible' the Fund became in recent years when it comes to 'hard' numbers underpinning it's 'programme sustainability' arithmetic.

30/5/15: Private Sector Counter-Proposal for Ukrainian Debt Restructuring

An interesting and far-reaching article on Ukraine's attempts to restructure some of its debts via Bloomberg:

In the nutshell, Ukraine needs to restructure its debt per IMF three targets for debt 'sustainability':

  • generate $15 billion in public-sector financing during the program period; 
  • bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and 
  • keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025

Note, these are different than what Bloomberg reports.

Key difference, however, is the matter of Russian debt. S&P note from February 2015 addressed this in detail: see more here: In simple terms, Ukraine's debt to Russia is not, repeat: not, a private debt. Instead it is official bilateral debt. As such it is not covered by the IMF programme condition for restructuring privately held debt regardless of whatever Ukrainian Rada or Government think. Full details of the IMF programme are linked here:

As I noted in March note, "IMF has already pre-committed Ukraine to cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme" ( Once again, Bloomberg 'conveniently' ignores this pesky fact about only private debt being covered.

Now, it appears we have the first private sector offer for restructuring. It is pretty dramatic, as Bloomberg note linked above outlines. But it is clearly not enough, as it involves no cuts to the principal. This is the sticking point because the proposal front-loads notional savings to the amount of USD15.8 billion, but it subsequently requires Ukraine to repay full principal - a point that is not exactly in contradiction to the IMF plan in letter, but certainly risks violating it in spirit. The chart below shows that beyond Q2 2017, Ukraine is facing pretty steep repayments of debt and there is absolutely no guarantee that by then Ukraine will be able to withstand this repayments cliff.

To further complicate issues, Ukrainian Parliament (Rada) passed a law last week that would hold off repayments of debt until there is an agreement with private holders on haircuts. This presents three key problems for Ukraine:

  1. The law can be used to hold off on repaying Russian debt, which is not private by definition and as such will constitute a sovereign default on bilateral loans. This will be pretty much as ugly as it gets short of defaulting on IMF.
  2. The law, if implemented, will also halt repayments on genuine private debt. Which will also constitute a default.
  3. If Russia refuses to restructure its debt (for example, citing the fact that it is non-private debt), Rada law will have to be applied selectively (e.g. if Rada suspends repayments on Russian debt alone), which will strengthen Russian position in international courts.

In case of default, be it on Russian debt or on private debt, or both, Ukraine will see its foreign assets arrested. Which involves state enterprises-owned property, accounts etc. The reason for this is that Rada has no jurisdiction over laws governing these bonds, which are issued under English law. In addition, Ukrainian banks - big holders of Ukrainian Government debt - will be made insolvent overnight as the value of their assets (bonds) will collapse.

Final point is that ex-post application of the law, there will be no possibility for achieving any voluntary restructuring of debt as all negotiations will be terminated because Ukraine will be declared in a default.

While Greece continues to attract much of the media attention, the real crunch time is currently happening in Kiev and the outcome of this crisis is likely to have a significant impact across the international financial system, despite the fact that Ukraine is a relatively small minnow in the world of international finance.

Here is Euromoney Country Risk assessment of Ukrainian credit risks:

Ukraine score is 26.30 which ranks the country 147th in the world in creditworthiness.

2/5/15: IMF to Ukraine: Pain, and More Pain, and Maybe Some Gain

A very interesting IMF working paper on sustainability and effectiveness of fiscal policy in Ukraine that cuts rather dramatically across the official IMF policy blather.

Fiscal Multipliers in Ukraine, by Pritha Mitra and Tigran Poghosyan, IMF Working Paper, March 2015, WP/15/71 looks at the role of fiscal policy (spending and investment) in the Ukrainian economy.

As authors assert, "since the 2008-09 global crisis, which hit Ukraine particularly hard, the government relied on fiscal stimulus to support recovery. In reality, it was the main lever for macroeconomic management… Today, even after the recent float of the Ukrainian hryvnia, fiscal policy remains key to economic stabilization." In particular, "Over the past five years, the government relied on real public wage and pension hikes to stimulate economic activity, sometimes at the expense of public infrastructure spending. Many argue that this choice of fiscal instruments undermined private sector growth and contributed to the economy falling back into recession in mid-2012."

Since the IMF bailout, however, fiscal adjustment is now aiming for a reversal of long term imbalances on spending and revenue sides. In simple terms, fiscal adjustment now became a critical basis for addressing the economic and financial crisis. As the result, the IMF study looked at the effectiveness of various fiscal policy instruments.

The reason for the need for rebalancing fiscal policy in Ukraine is that current environment is characterised by "…the severe crisis, its toll on tax revenues, and financing constraints, necessitate fiscal consolidation. But the challenge is to minimize its negative impact on growth."

In other words, the key questions are: "Will tax hikes or spending cuts harm growth more? Does capital or current spending have a stronger impact on economic activity?"

Quantitatively, the paper attempts to estimate "…the fiscal multiplier – the change in output, relative to baseline, following an exogenous change in the fiscal deficit that stems from a change in revenue or spending policies."

The findings are: "Applying a structural vector auto regression, the empirical results show that Ukraine’s near term fiscal multipliers are well below one. Specifically, the impact revenue and spending multipliers are -0.3 and 0.4, respectively. This suggests that if a combination of revenue and spending consolidation measures were pursued, the near-term marginal impact on growth would be modest", albeit negative for raising revenue and cutting spending.

"Over the medium-term, the revenue multiplier becomes insignificant, rendering it impossible to draw any conclusions on its strength. The spending multiplier strengthens to 1.4, with about the same impact from capital and current spending. However, the impact of the capital multiplier lasts longer. Against this backdrop, the adverse impact of fiscal consolidation on medium-term growth could be minimized by cutting current spending while raising that on capital."

The risks are unbalanced to the downside, however, so the IMF study concludes that "Given the severe challenges facing the Ukrainian economy, it is important that policymakers apply these results in conjunction with broader considerations – including public debt sustainability, investor confidence, credibility of government policies, public spending efficiency. These considerations combined with the large size of current spending in the budget, may necessitate larger near- and long-term current spending cuts than what multiplier estimates suggest."

In simple terms, this means that, per IMF research (note, this is not a policy directive), Ukrainian economy will need to sustain a heavy duty adjustment on the side of cutting public spending on current expenditure programmes (wages, pensions, purchasing of services, provision of services, social welfare, health, etc) and, possibly, provide small, only partially offsetting, increase in capital spending. This would have to run alongside other measures that will raise costs of basic services and utilities for all involved.

The problem, therefore, is a striking one: to deliver debt sustainability, current expenditure and price supports will have to be cut, causing massive amounts of pain for ordinary citizens. Meanwhile, infrastructure spending will have to rise (but much less than the cuts in current expenditure), which will, given Ukrainian corruption, line the pockets of the oligarchs, while providing income and jobs to a smaller subset of working population. Otherwise, the economy will tank sharply. Take your pick, the IMF research suggests: public unrest because of cut-backs to basic expenditures, or an even deeper contraction in the economy. A hard choice to make.

In the end, "More broadly, fiscal multipliers are one of many tools policymakers should use to guide their decisions. Given the severe challenges facing the Ukrainian economy – including public debt sustainability, low investor confidence, and subsequent limited availability of financing – it may be necessary for policymakers to undertake stark consolidation efforts across both revenues and expenditures, despite the adverse consequences for growth."

7/4/15: IMF: Ninth Time is Gonna be Lucky in Ukraine

It is perhaps revealing that the IMF is being forced to defend its Ukraine package 2.0 only a month after it was unveiled. And even do so without providing any explicit risk assessments. Here is the latest on the Fund efforts on this front. Lipton's full speech is here:

Of note two things:

  1. This is an 9th lending programme by the Fund to Ukraine, with 8 previous ones being... err... not exactly successful.
  2. The current programme is based on (see details here: assumed 2015 real GDP contraction of 5.5%, growth of 2% in 2016, 3.5% in 2017 and 4% every year thereafter through 2020.  And below is the table of forecasts from the Central Bank of Ukraine (NBU) showing 2015 forecast for -7.5% growth and 2016 forecast for 3% growth. It also shows that NBU estimates y/y growth in Q4 2014 to have been -14.8% and Q1 2015 growth to be -15%. And that -7.5% growth in 2015 will require positive growth in Q4 2015 and a relatively modest contraction in Q3 2015.

All of which suggests that the Fund leading 'assumption' on growth might be a touch optimistic. And that makes its leading 'target' for debt/GDP ratio of 94% at year end 2015 to be a touch unrealistic. Just as the Funds' all previous leading assumptions and targets that the IMF set in all previous lending arrangements with Ukraine.

But, as the Good Director might say, this time it is different...