Ukraine has issued $1 billion in sovereign eurobonds at a rate of 7.65 percent, helping cover the significant debt repayments due in 2013. Nonetheless, a new agreement with the International Monetary Fund, whose negotiators are in Kyiv until Feb. 12, remains critical for state finances.
Monday’s eurobond issue was Ukraine’s cheapest
for a long time, below the 7.8 percent rate for the $1.25 billion issue in
November last year, and far less than the 9.25 percent the country paid for $2
billion in July 2012.
Given that Ukraine will have to repay a record
$9 billion in foreign currency denominated debt this year, the issue was only
to be expected, experts say.
The new issue should cover the country’s
February financing needs, and even some of those falling due in March,
according to analysts at Kyiv-based investment bank Dragon Capital.
Nonetheless, the investment bank’s analysts noted: “we continue to think that
the authorities will eventually need to strike a deal with the IMF to deal with
this year’s peak redemptions.”
At present, the end of March seems to be the
new deadline for an IMF deal, with $1.35 billion falling due to this lender
alone late in April.
Ukraine’s government has so far sent out
positive signals about negotiations with the fund, which have been ongoing
since Jan. 29. Most recently, Serhiy Arbuzov, the former central bank head and
current deputy prime minister, said a new deal was expected by early March.
Yet there has been little movement toward
meeting the conditions set forward by the lender – lifting the de facto
subsidies on household gas consumption and moving towards a flexible currency
regime for the hyrvnia, which has been strongly tied to the dollar, despite
macroeconomic pressures for devaluation. These two problems, the argument goes,
are blowing a hole in the budget and holding back investment, respectively.
Prime Minister Mykola Azarov has long opposed
any gas tariff hikes, which would come at a significant cost, though recent
statements by government officials suggest this is not set in stone.
Nonetheless, some see the timing of the eurobond issue – right in the middle of negotiations with fund – as a signal
that talks are going nowhere.
“Judging by how hastily the issuer went to market, we do not expect to
hear any good news. The issuer’s logic is clear: Ukraine has to pay back $980
million in principal to the IMF, and with no new agreement with the fund in
place, eurobond issuance is the most affordable financing option,”
international investment bank Troika Dialog wrote in a note to investors.
Ukraine’s international reserves were at $24.5
billion at the end of last year, less than the amount needed to cover three
months of imports – a rule of thumb used by economists to gauge a country’s
resistance to external shocks. This means dipping into the piggy bank is not a
realistic option to pay down the country’s debt.
In a December 2012 report, investment bank
Concorde Capital warned that if current policies are maintained and reserves
drop to a level of $18 billion, or two months of imports, Ukraine may face a
major crisis with uncontrolled devaluation, not unlike its northern neighbor
Belarus.
Without devaluation, reserves would drop to
$18.2 billion by the end of the year, the investment bank estimated, while no
IMF deal would mean a fall to $15.2 billion.
But this outcome is not unavoidable, the
report noted, as long as cooperation with the IMF is renewed and the hyrvnia
weakened as soon as the first half of the year.
Kyiv
Post editor Jakub Parusinski can be reached at [email protected]
