International Monetary Fund deputy communications chief William Murray had no news on July 28 on the timing of the board meeting to decide on disbursement of the next $1 billion loan to Ukraine under the second review of the $17.4 billion program.
It is a huge disappointment that we have seen no IMF disbursements since August 2015. Ukrainian policymakers and politicians seem to be in no rush. Partly this is explained by solid signs f macroeonomic stabilization, which breeds complacency and arrogance — how many times have we seen this before?
And we have populists such as member of parliament Yulia Tymoshenko, and oligarchs such as Serhiy Taruta suggesting no need for the IMF program and that Ukrainian elites know best.
The next thing we will be hearing is that Ukraine can now finance itself in the market – that would be a terrible sign in my mind, as under ex-President Viktor Yanukovych, this ended in twin deficits, revolution and debt restructuring.
Delay costly
There is an assumption that there is no cost from delay. But there is.
The IMF program is not just important for the money, but the reform anchor, and I think the message it sends to investors and to other bilateral and multilateral donors. And I do think it is fair to say that Ukraine fatigue is building.
The IMF tranche is required to secure issuance of the third $1 billion loan guarantee from the US, plus European Union funds.
I think people are trying to gauge just where Ukraine is on the reform account, and it is often difficult to judge that when there are lots of competing and conflicting messages, and particularly with limited progress on fighting corruption and graft.
Maybe Ukrainian elites just don’t care as they now sun themselves on the beaches of the Maldives.
Slower growth
There is a more direct link into and impact on economic activity as, without the IMF cash, the NBU rebuild of foreign exchange reserves is slower. NBU governor Valeria Gontareva on July 28 noted that reserves will not reach $18 billion by year end as previously targeted, but nearer to $17 billin. That means a slower move to remove administrative restrictions on foreign-exchange transactions. As long as these remain in place trade and economic activity will continue to be constrained.
The IMF program is being held up by failure to set a framework for pension reform, plus a few technicalities with respect to budget financing ..plus I guess affirmation of some promises made with respect to recapitalization of large, systemically important banks.
Some recent political moves to backtrack on utility price hikes also do not help the mood music.
Groysman’s credibility
Official creditors and investors were prepared to look through the political jinx which saw the demise of the Arseniy Yatseniuk administration, assuming that the new prime minister, Volodymyr Groysman, could perhaps bring new skills into the mix, particularly administrative skills and political relations in the Verkhovna Rada, plus the trust of his mentor, President Petro Poroshenko.
Groysman’s credibility is on the line in the eyes of official and private creditors alike.
If we don’t see the IMF signoff by September at the latest, then I think it will be fair to ask why was the government reshuffled in April. The fact that Ukraine’s policy elites may well be stalling when it comes to the IMF is all the more worrying given that security trends in the east are not encouraging. Failure to normalize the security situation in the east has implications in terms of domestic politics in Ukraine, plus the economy. It has tended to see locals buy foreign currency, weakening the hryvnia, and making the NBU’s job in stabilizing the macroeconomic financial situation that much more difficult. Interestingly, we are not seeing locals buy foreign currency just yet, quite the opposite, as the NBU is still fighting appreciation pressures, with $30 million to $50 million in foreign-exchange purchases now every day, and helped by the fact that the current account has been running in surplus in recent months.
Putin’s aims
I am a little perplexed as to explain the deterioration in the security situation in the east, given my prior assumption that Vladimir Putin is willing to take the foot off the gas in the near term in Ukraine, eager to play to political supporters in the EU (and perhaps to his friend Donald Trump) to ensure sanctions are removed by year end, to provide a clear economic run to the 2018 presidential elections.
There has been talk that Moscow might just accept some kind of settlement under U.S. President Barack Obama, assuming Trump fails in his presidential bid, and that Hillary Clinton will inevitably be a hawk on Russia and Ukraine.
Other pressure
It might also just reflect local tensions, or even Ukraine’s desire to exploit Russia’s unwillingness to get dragged into a larger conflict in Ukraine this side of U.S, presidential elections, and providing something of an excuse then not to deliver on IMF-related reforms. All these causes are possible in my view, but as ever with conflicts, they risk getting out of hand by nature of the very fog of war.
There is also evidence that Russia is returning to a strategy of heaping pressure on Ukraine through other channels, by taking legal steps to try and bring forward a decision in the U.K. courts over the disputed $3 billion in December 2015 Eurobonds, plus also reducing gas transit flows through Ukraine, which has recently dropped to an annualized flow rate of less than 50 billion cubic meters, well below one half of annual capacity.
Ukraine could still see 1 percent real gross domestic product growth his year, close to IMF targets, and even outshining Russia — a bit embarrassing for Putin and perhaps does explains the upsurge in the fighting in the east.
Encouragingly, the NBU was also able to further trim its policy rates (from 16.5 percent to 15.5 percent on July 28, but still have close to double digit real rates.
Timothy Ash is the London-based head of Central Eastern Europe, Middle East & Africa credit strategy for Nomura International, a Japanese financial holding company.
