Ukraine: IMF staff agreement on new SBA, funding needs still large
- Board approval on new 18-month SBA amounting to US$5bn expected in coming weeks
- Agreement will catalyse additional bilateral and multilateral support; but Ukraine will also need to come to market
- We calculate a public sector financing requirement for this year and identify financing sources
The IMF announced overnight that it had reached staff-level agreement (SLA) on a new programme for Ukraine, an 18-month Standby Arrangement (SBA) amounting to cUS$5bn (180% of quota). Board approval is expected in coming weeks (we suspect by mid-June).
The IMF's announcement is welcome news although widely expected given recent developments in Ukraine (see our Credit Weekly from 14 May). Crucially, the SLA follows the recent passage of the banking law by Ukraine's Parliament (Rada), after which further time was needed to allow for parliamentary procedures ahead of the presidential signature that occurred yesterday, according to reports. Approval of the banking law, which prevents former owners of nationalised or liquidated banks from regaining ownership or receiving state compensation, was seen as the last remaining hurdle to reaching an agreement with the Fund on a new programme.
The IMF had earlier confirmed a change in the nature of programme discussions for Ukraine. The IMF informed at its regular press briefing on 7 May that the programme discussions had switched from a three-year EFF (on which staff-level agreement for a US$5.5bn facility was reached in December, pending completion of certain prior actions) to a new shorter 18-month SBA, with less structural conditionality. The size of the new SBA was reported at around US$5bn, according to local reports. The switch in focus has been partly driven by the impact of coronavirus and an urgent financing need.
But US$5bn isn't US$10bn, is it? Recall that in March, in the early stages of the coronavirus pandemic and global economic crisis, the IMF Managing Director Kristalina Georgieva noted that ongoing discussions involved a bigger programme than previously thought, appearing to confirm local reports that the EFF will be up to US$10bn. Hence, there might be some disappointment with the apparent smaller size of the agreement now, that Ukraine will not receive as much as it wanted. However, we point out that on a pro-rata basis, US$5bn over 18 months is broadly equivalent to US$10bn over 3 years. And, in fact, the SBA is a better deal for Ukraine, being the same amount (pro-rata), with faster disbursements and less conditionality than would be the case under an EFF arrangement. There wouldn't be a need (or time) for many programme reviews in an 18-month programme either. It also seems that this programme agreement has usurped Ukraine's parallel request for emergency IMF financing (RCF/RFI). Still, we think President Zelensky will have to take care in explaining these changes to his domestic audience and why the money is less.
Moreover, the IMF statement yesterday noted that the new SBA is expected to catalyse additional bilateral and multilateral financial support. The government has spoken of around US$10bn in support, including IMF money, with more coming from donors. However, we are not sure all this will arrive at once.
We think the new SBA will allow a maximum disbursement of cUS$3.4bn in 2020 from the IMF, given the Fund's own lending rules (an annual limit of 145% of quota and net of principal repayments). But we think this won't arrive all in one go. We think it might imply two equal disbursements this year, half (US$1.7bn) on programme approval and the other half in a second tranche after completing the first review, presumably before year-end, assuming programme reviews are every six months, unless the Fund agrees to frontloading of course (which might be warranted given the BOP need).
However, even with IMF and donor money, we think the public financing outlook this year is still challenging.
Figure 1: Ukraine 2032 US$ bond – price (%)
Source: Bloomberg, Tellimer Research
Figure 2: Ukraine 2032 US$ bond – yield (%)
Source: Bloomberg, Tellimer Research
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