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Ukraine Politics January 2020

Ukraine: Ukraine nears new IMF deal, boding well for the economic outlook

On 7 December, Ukraine and the IMF announced a three-year USD 5.5 billion arrangement under the Extended Fund Facility (EFF), which, if approved by the lender’s Executive Board, would represent the third support package by the Fund since the 2014 recession. The deal was reached just before the long-awaited peace talks between President Volodymyr Zelensky and his Russian counterpart. If it comes into force, the deal should lead to structural reforms, boost investor confidence and provide the government with additional financial leeway to tap international capital markets.

The IMF’s executive board is expected to approve the deal in Q1 provided the government implements a set of unspecified “prior actions”, which could involve reforms to strengthen the banking sector. Negotiations with the Fund had previously stalled due to a dispute over the IMF-backed nationalization of commercial lender PrivatBank, formerly owned by Igor Kolomoisky, the oligarch who backed Zelensky’s presidential campaign. More recently, however, the president reportedly gave assurances to the IMF that PrivatBank will not be returned to Kolomoisky, which hints he is losing influence over authorities.

A new IMF deal should uphold investors’ confidence in the hryvnia and thus enable the government to issue Eurobonds this year in order to meet its heavy FX-denominated debt repayments due in 2020–2021, of USD 9.0 billion and USD 6.8 billion respectively. While the tough economic overhaul recommended by the Fund, including a move to market-based energy prices, may dampen consumption in the near-term, market-friendly reforms should strengthen the business environment and support fiscal consolidation further ahead. Nevertheless, the Fund could yet withhold financial aid if the government backtracks on its banking sector reform agenda.

With regards to the risks that could jeopardize a new deal with the IMF, Investment Capital Ukraine (ICU) highlighted:

“[…] the clean-up of the Ukrainian banking sector, its recapitalization, and cessation of insider-lending practices were the key issues of the previous IMF programmes, which Ukraine has already met. Reversal of these or other previously achieved benchmarks demerges the efficiency of IMF programmes and targets. Therefore, any possible attempts to return Privatbank to its former shareholders or compensate them would constitute a point of no return for the Fund. Yet, we expect the domestic and foreign legal battles over the bank’s nationalization and possible fraud at the bank prior to nationalization will take more than a year to resolve. During this period, Ukraine is likely to abstain from crossing red lines so as to remain in the IMF programme.”

Meanwhile, analysts at JPMorgan noted:

“The biggest threat comes from powerful businessmen largely represented by the oligarchic structure over-imposed on weak institutions. Successive IMF programs have tried to move Ukraine away from this situation and have been partly successful, at least through creation of some institutions. However, the economy remains largely in the hands of oligarchs and de-oligarhization would probably take decades. These structures, represented by various businessman and groups of interests, will likely oppose IMF-driven reforms as their businesses suffer.”

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