IMF waits for completed Ukraine’s debt operation to approve new tranche

The IMF mission to Ukraine released a statement on May 31 addressing its first review with Ukrainian officials of its Extended Fund Facility (EFF) program. In general, the IMF is satisfied with the program since all performance criteria for end-March were met and all structural benchmarks due in the spring are on course to be met, disregarding some delays.  “Understandings were reached on most issues and discussions will continue in the comings days to finalize a staff-level agreement,” said Nikolay Gueorguiev, the IMF mission chief for Ukraine.

At the same time, the completion of the ongoing debt operation is required for finalizing the review, according to IMF officials. “Continued financial support for Ukraine’s reform efforts from official and private creditors is vital for the success of the program,” Gueorguiev said. It was earlier scheduled that the IMF board would decide on Ukraine’s second tranche in mid-June. 

Ukraine’s Finance Ministry said on May 29 the talks on debt restrcuring will intensify between its advisors and the advisors of its creditors this week, with a follow-up call scheduled for June 5 with the principals to assess the progress.

The IMF mission revised downward its GDP growth forecast for Ukraine to -9.0% from -5.5% it estimated previously and worsened its inflation forecast to 46.0% YTD from 26.7% YTD previously.

Alexander Paraschiy: The message from the IMF has finally dispelled doubts on whether the debt operation’s completion is critical for Ukraine to receive the second tranche of the USD 17.5 bln EFF program. As Ukraine’s private creditors are now aware of the IMF’s strict position, which was not explicitly written in the EFF memorandum and staff level agreement, they might be some more receptive to the Ukrainian position in the debt restructuring talks.

It’s not critical for Ukraine to get a new IMF tranche on time (mid-June) since the Finance Ministry placed USD 1.0 bln in Eurobonds under U.S. state guarantees and we expect gross reserves to exceed USD 10 bln as of June 1. What more, excess demand for foreign currency also reduced pressure on gross reserves. At the same time, Ukraine has to finalize the deal with creditors as soon as possible to avoid large external repayments that would undermine its bargaining position. The first important deadline is June 20, when Ukraine is scheduled to pay a USD 75 mln coupon for USD 3.0 bln in Eurobonds purchased by the Russian National Welfare Fund. We believe it’s important for the government to reach a deal by that date. An even more critical deadline is Sept. 23, when USD 500 mln in Eurobonds is due.