IMF, Ukraine reach staff-level agreement on 14-month, USD 3.9 bln program

IMF and Ukrainian authorities have reached a
staff-level agreement on a Stand-By Arrangement (SBA), the fund reported on
Oct. 19. The USD 3.9 bln, 14-month loan program would replace the existing EFF
program, which was launched in 2015 and enabled Ukraine to receive USD 8.5 bln
in lending out of USD 17.5 bln offered. The new program  will focus “on continuing with fiscal
consolidation and reducing inflation, as well as reforms to strengthen tax administration,
the financial sector and the energy sector,” the IMF commented.

The agreement is subject to approval by IMF management
and the executive board, which is expected “later in the year, following
parliamentary approval of a government budget for 2019 consistent with IMF
staff recommendations,” according to the fund’s press release.

The program sets a new foundation for Ukraine’s
cooperation with the IMF for a period beyond the tenure of the current
presidential and parliamentary terms, Ukraine’s Finance Ministry commented on
Oct. 19, adding that it will help Ukraine implement its fiscal and monetary
policy.

Alexander
Paraschiy: The new program is encouraging in that it would
succeed in reducing Ukraine’s sovereign risk for the next 1.5 years. We expect
Ukraine will be able to comply with enough conditions of the new program to
secure at least one loan tranche this year. However, the full loan program may
have many demands, not easier than the EFF loan.

With the proposed loan yet to be approved, the main
purpose of the Oct. 19 announcement was to enable Ukraine’s government to enter
the international debt markets as soon as possible. Following such
“cheerleading” from the IMF, we expect Ukraine’s MinFin will place
international Eurobonds in the coming weeks, which will allow it to fully
finance the 2019 budget deficit, as well as boost Ukraine’s gross international
reserves back to the safe level of over three months of future imports. On top
of that, some state-controlled companies will gain the chance to attract
Eurobonds in the coming weeks.

The IMF’s announcement became possible after Ukraine’s
parliament adopted the 2019 draft budget and approved in full a bill
to improve creditor protection. Another prerequisite was
fulfilled by  the Cabinet, which announced on Oct. 19 its decision to increase natural gas rates for households and heating utilities by 23.5% as
of November.

However, the first tranche under the new program will
become possible only after the 2019 budget is approved in full, which is likely
only in late November or December. Only after this tranche can Ukraine receive
its agreed-upon loans from the EU (EUR 0.5 bln) and the World Bank (up to USD
0.8 bln). So far, we believe all this financing will arrive by the end of 2018,
but it could happen that some of funds will arrive in early 2019.

In any case, the Oct.19
announcement is among the best developments for Ukraine this year. And it is
supportive for Ukraine’s sovereign bond curve, as well as Ukraine’s national
currency, which now looks as safe as we described in our report released on
Oct. 12.