While the world's eyes are on the nature of the Trump-Zelensky phone call on the Bidens ('Ukrainegate' – covered in detail by our research providers Macro-Advisory here), investors' focus is on the relationship between the IMF and the Ukraine government.
The IMF Article IV mission in Ukraine is due to wrap up this week (see here) and markets will be focusing on whether it concludes with a formal request for an IMF programme, or even a staff-level agreement on a new programme that could go to the board in the coming weeks. That is, assuming Kiev still wants a programme, given that it is able to borrow in the market in US$ at 7% or less (also given where its eurobond yields are). We think it does, and media reported (as recently as 29 August) new Prime Minister Oleksiy Honcharuk stating that programme talks would commence soon. This intent was confirmed after a Cabinet meeting on 19 September, according to media.
We think, while financial constraints may have eased and there is no pressing balance of payments (BOP) need, investors would welcome another IMF programme in Ukraine as a demonstration of the new President and government’s reform commitment. That being said, while the President and government may be politically inexperienced, the economic team isn’t and offers strong policy continuity.
And the time it has taken to get here shouldn’t be a concern either (ie we don’t think it signals waning appetite, from a reform point of view). Rather, despite the statements over the summer that the new President and his team were interested in a new programme, we think one reason why we haven’t seen programme negotiations or a formal request sooner is because the new government (under Honcharuk) has only just been formed (Honcharuk was appointed at the end of August), and the IMF needed time to visit and discuss the new government’s policy intentions, which it has only been able to do now.
The Letter of Intent (LOI) between the IMF and the authorities has to be signed by the President, Prime Minister, Minister of Finance (Oksana Markarova has remained in the role) and the National Bank of Ukraine (NBU) governor, and so until the Prime Minister was chosen, there was no negotiating authority. Besides, bonds have rallied even without a programme (following President Volodymyr Zelensky’s parliamentary success), although maybe that’s because of the expectation that the authorities will quickly work towards securing one.
However, there are no details, as yet, on the nature of the programme being sought, its content, type or size. Given no obvious BOP need and the strong macro-financial stabilisation achieved so far, we think the focus will be on the structural reform agenda. This will focus on continuing the reforms seen so far (anti-corruption, gas tariffs) and tackling those that have so far proved more elusive (land reform, privatisation). We think a small-ish three/four-year EFF would be appropriate, picking up where the 2015-2018 EFF programme left off (the small, US$4bn SBA approved at the end of last year was only meant to be a bridge during an election year). Reports have suggested a new programme would be for US$6bn. And any IMF programme would help to catalyse other donor financing from the World Bank and EU.
The new government has already taken measures, which we think could form the basis of prior actions for a programme (or lay the ground for future structural benchmarks). First, the minister of finance presented the draft 2020 budget to parliament on 20 September (unusually early in the year). It targets a 2.1% of GDP budget deficit. That would seem to us IMF-compliant, but we await the Fund’s views on this. Second, the Prime Minister presented the government’s strategy for farm land sales (aka land reform) on 19 September, with the Ministry of Economic Development, Trade and Agriculture publishing the text of the draft law on 20 September. The land reform is due to come into force on 1 October 2020. We think land reform will be a crucial condition in any new IMF programme. Hence, this announcement is positive, although we await more details and, in particular, the reaction of the IMF/World Bank.
However, the situation with Privatbank could be a potential sticking point to agreement on (or compliance with) a new IMF programme. While the authorities seek compensation from the former owners via court cases all around the world, Ihor Kolomoisky has launched a number of counter claims. We’re not sure how this will play out, how long it will take, and whether it is even possible to reach an acceptable settlement, but clearly, the reversal of nationalisation would be unacceptable to the IMF, as would any threat to central bank independence, financial stability, or any solution that was perceived as overtly politicised. It is also not clear how much room there is to compromise. We suspect that an amicable or arbitrated outcome that followed the rule of law, due process and respected judicial independence (which is, after all, one element of what the anti-corruption agenda is all about) should be acceptable to the IMF. However, this isn’t going to happen quickly, so it might be necessary to specify a path towards this, with structural benchmarks to be assessed in subsequent reviews.