Ukraine: Pace of contraction slows in the second quarter, Ukraine reaches key debt restructuring deal
September 8, 2015
The Ukrainian economy improved in the second quarter of 2015, according to a preliminary estimate by State Statistics Service of Ukraine, halting the economy’s downward growth trajectory. The economy contracted 14.7% over the same period last year in Q2, which was a more moderate drop compared to the first quarter’s notable 17.2% fall. While the result still marked a deep contraction, the figure suggests that the country’s downward spiral driven that has been by the military conflict in the east may have bottomed out. In addition, other positive news has begun to emerge from crisis-hit Ukraine. In July, the contraction in industrial production moderated for the third month in a row and inflation eased to the lowest level in one year. Moreover, after months of negotiating, the Ukrainian government reached an agreement on debt restructuring with its private creditors on 27 August, plugging part of the country’s financing gap.
The deal restructures USD 18 billion of Ukraine’s debt and satisfies a key condition of the International Monetary Fund’s (IMF) bailout agreement. While the deal is not expected to be finalized until the end of October, the initial agreement entails a 20% nominal haircut and postpones payments until 2019. In addition, GDP warrants will be issued, linking payments to economic growth and shielding the government from having to pay if GDP growth is below 3.0%. While the deal has largely been seen as positive for the debt-ridden economy, a few potential hiccups remain. First, the agreement still needs to be supported by the 75% of bond holders, which is not guaranteed. In addition, Russia is the second-largest holder of Ukrainian debt and seems likely to not accept the deal. Russian Finance Minister Anton Siluanov has publicly rejected the agreement and the Ukrainian government has refused to give Russia preferential terms, which could set the stage for conflict in the upcoming months. As well, the agreement increases Ukraine’s debt burden in the long-term, especially from 2019–2025, when the country’s initial payments to the IMF are due.
Despite the positive news that has begun to emerge from Ukraine, the country’s outlook is grim. The ceasefire agreement continues to be violated and political tensions have risen in recent weeks. A parliamentary vote to grant separatist regions greater autonomy, a condition of the ceasefire agreement, was met with large protests on 31 August and the government’s popularity has begun to erode. Moreover, it is unlikely that the economy will recover without a lasting resolution to the conflict in the east of the country and only shaky progress has been made toward a deal so far.