Nation’s public and private debt has hit $100 billion, and the cost will be passed to future generations.
Ukraine’s public debt is rising with each multi-billion dollar bailout from a Western lender. So is the nation drowning in debt? Not quite yet, say experts. Unlike personal debt, it is harder to tell when a nation’s debt burden has become too high to be manageable.
Ukraine will find out when the payments start coming due. It seems clear that future generations will get saddled for the cost of billions of dollars in emergency loans racked up today. Absent an economic boom, the tradeoff for the nation in the future may turn out to be lower public spending – for teachers, pensions, transportation and other public services – as a larger share of tax revenue goes to debt service.
The foreign sovereign debt of Ukraine reached $19 billion by the end of June – about 30 percent of gross domestic product, half of the debt-to-GDP ratio at which default on loan obligations is considered likely for developed economies. That is 19 percent of the nation’s overall debt of roughly $100 billion on June 30, according to Dragon Capital, the Kyiv investment house. The other parts of the debt are corporate-sector debt ($46 billion) and bank-sector debt ($35 billion).
Some even think that borrowing more would be a good idea if the money is plowed into investments – such as energy-efficiency projects or gas pipeline upgrades – that will pay dividends in the long run.
One of them is the prime minister of Ukraine. “Not only can we, it is necessary for us to increase the debt,” Yulia Tymoshenko said in meeting with heads of the car-building industry in Kharkiv in the end of August, according to Delo newspaper.
Another is Oleksandr Savchenko, the former deputy governor of the National Bank of Ukraine who resigned on Sept. 11 after accusing his central bank colleagues of conspiring with some commercial banks to profit from insider trading and currency speculation. He also said the bank is “not an independent body.”
Savchenko, who quickly found a new job as deputy finance minister, said Ukraine should increase its budget deficit in 2009 to 10 percent of GDP from the current 6 percent. The increased state spending should be invested in the economy, Savchenko said. “In absolute figures, 10 percent is around Hr 100 billion. One should not be afraid of this sum … if the money is invested using adequate instruments and into efficient projects,” Savchenko told Kontrakty weekly in an interview.
Still, some $10.6 billion in loans have already come from the International Monetary Fund. Billions of dollars more may come from the World Bank and other Western lenders. And perhaps more aid is needed to help service or roll over some $31 billion in external sovereign and corporate debts that mature in 2010, according to some experts. And with much of the borrowing and repayment to take place in U.S. dollars, the value of the wobbly hryvnia – steadily losing ground against the dollar – will be closely watched.
The first IMF repayments will come in 2012, far enough away for people to become complacent. “Starting from 2012, the pressure on the budget will be huge,” said Oleksiy Blinov of Astrum Investment Management. “It’s likely Ukraine will need new loans to roll over the debt.”
While Tymoshenko highlights comparisons with developed nations that make Ukraine’s debt plight seem less severe, she left out one important point: Ukraine is not a highly developed nation, with a stable GDP or budget revenues. The nation’s economy is heavily dependent on exports of commodities, such as steel, that fluctuate wildly in price. Other sectors are badly outmoded and in need of modernization. And, with all its bureaucracy and rampant corruption, a large shadow economy still exists.
Part of the solution is to encourage rapid development of small- and mid-sized businesses, an underdeveloped segment of Ukraine’s economy. “In the last half of the year, nearly 40 percent [of small and mid-sized businesses] halted their activity or went into the shadow economy because of government corruption, pressure and the crisis,” said Yaroslav Misyats, the head of the Small and Medium-Sized Business Party.
What else, besides encourage development of small businesses, can Ukraine do in the next few years not to become addicted to loans? The list is endless, but Misyats also said the nation should re-negotiate a more favorable gas agreement with Russia and adopt a more austere budget – including by shrinking the state bureaucracy.
“A lot could be saved if unreasonably high privileges for the [parliamentary] deputies are cut,” said Olena Bilan of Dragon Capital.
A good place to start is by cutting some $31 million in perks Ukrainian lawmakers got for higher standard medical care and vacations at health spas. Experts said that money would be better spent by helping cash-strapped war veterans, who got only about $3 million in comparable perks, or beefing up a $50,000 national program to support small businesses.
Blinov of Astrum Investment Management said that privatization of state assets can partially eliminate the need for new debt. He also said that some new forms of taxes can be introduced on real estate and capital gains.
Ukraine could also try to grow its way out of debt, and Tymoshenko said Ukraine will start doing that next year with a 3.7 percent rise in GDP. Others are skeptical of the projection.
“The rate, expected by our government in 2010, is rather ambitious, even compared to developed economies. I don’t think the GDP will be growing at this pace next year,” Vasyl Gorbal, board member of National Bank of Ukraine, said.
Even if GDP grows at Tymoshenko’s expected rate, “we still won’t reach the level of [pre-crisis] 2008,” according to Volodymyr Lanoviy, former economy minister.
Aside from government debt, other financial landmines exist.
“The credit-deposit [banking] system is devastated in Ukraine. Foreign banks are leaving us, and new ones would not dare to step in this land of financial disorder,” Lanoviy said. This credit slowdown will, in turn, hurt the NBU, he said.
Lanoviy said that band-aid remedies won’t succeed in putting Ukraine’s economy back on track.
“Ukraine has to be cured. Only drastic and holistic reforms in every area, starting from the institutions of power to modernization are needed. Tymoshenko is delaying reforms for some reason … Insolvent banks need to be bankrupted and even [get] punished, not bailed out. Only then can we think of improvement,” Lanoviy said.
