IMF approves US$15.2 bn stand-by loan

The consensus view would appear to be that while the IMF Executive Board approval of US$15.2 bn 29-month stand-by arrangement (agreed earlier in July) is undoubtedly a good thing for the country, the main benefit has already occurred in forcing compliance with the loan conditions. rnAn initial disbursement of USD 1.9 bn is available immediately (expected to be earmarked for budget deficit financing), with subsequent tranches to be disbursed quarterly.

This facility replaces Ukraine’s previous US$16.7 bn programme, from which Ukraine drew some US$11 bn up to 2009 before it was closed due to failure to comply with the programme’ conditions. Similar strict conditions had to be met to secure the funding, including raising retail gas tariffs by 50%, reducing the state budget deficit by 0.3% of GDP and enhancing the independence of the National Bank of Ukraine. Ukraine also committed to comprehensive fiscal adjustment including major structural reforms to the pension system, public administration and the tax system in order to achieve a government deficit of just 3.5 % of GDP in 2011 and 2.5 % in 2012, and setting public debt firmly on a downward path to below 35% of GDP by 2015.

Analysts at Raiffeisen Research, RZB Group, noted that given Ukraine’s poor record of compliance with IMF programme conditions, the implementation of the stand-by arrangement may prove difficult, commenting, “We do not fully rule out the possibility that the programme will slip off track at some point in the future.”

Concorde Capital analyst Mykyta Mykhaylychenko concurred, saying “We see Ukraine as likely to fall somewhat short of these goals (especially regarding fiscal deficit in 2011-2012), but able to keep public debt within 40% of GDP by 2015.”

However, Mykhaylychenko described the imposition of fiscal discipline to achieve the loan as the most important impact – more than the actual money. She explains, “In July, in order to obtain the funds: (i) Ukraine’s parliament cut the planned 2010 fiscal deficit by 7%, reducing outlays (by 5.3%) and making more conservative estimates of future revenues; (ii) the government increased gas tariffs for households by 50% starting August 1; and (iii) parliament increased the independence of the central bank. Following the changes, we expect the fiscal deficit (including Naftogaz) to amount to 6%-6.5% of GDP in 2010 (vs. 7.4% in 2009).” Mykhaylychenko also noted that the new IMF facility will provide strong support to the US$/UAH exchange rate by sending a positive signal to international investors, unlocking financing from other international organisations (World Bank, EBRD, European Commission), and supporting central bank reserves.

Raiffeisen’s assessment was similar, also suggesting that the IMF stand-by arrangement will have a positive impact on the domestic economy and financial markets and will facilitate an economic recovery. Specifically, that it will strengthen the foreign exchange position of the central bank, ease the strains on the public budget, open the door for other loans from the EU and World Bank and provide impetus for desperately needed structural reforms. Also, despite the fact that the agreement between Ukraine and the IMF was already priced in by the markets, Raiffeisen expects a further tightening of spreads among Ukrainian sovereign bonds and CDS following the likely upgrade of the country’s ratings.