An International Monetary Fund mission will visit Ukraine at the end of March to discuss a resumption of lending with the new leadership and Ukrainian officials said on Wednesday they expected "difficult talks."
In advance of the Fund’s arrival, Ukraine’s new leaders gave an assurance that the ex-Soviet republic would meet its debt repayment obligations, both domestic and foreign.
At the end of January, Ukraine’s debt stood at $26.5 billion — about $15 billion foreign and the rest domestic.
"Ukraine will meet its obligations and the government will do all it can to ensure that no-one has any doubts about this," presidential administration official Irina Akimova said.
"I hope that there will be no longer any questions of technical default and default in general relating to Ukraine," she told journalists.
The country of 46 million has been badly hurt by the global economic crisis which hit its major export markets of steel and chemicals and brought turmoil to its internal finances.
Under a $16.4 billion bail-out programme, the IMF disbursed about $10.5 billion but then suspended the programme late last year after Ukraine decided to increase minimum wages and pensions in breach of earlier commitments.
The new leadership of President Viktor Yanukovich, which faces monthly bills of around $700 million for Russian natural gas alone, has made it clear it wants to get back on to a new funding programme with the IMF.
2010 BUDGET
But it will have to impress the IMF with its ideas for fiscal prudence and particularly with what it plans for its draft budget for 2010.
"The arrival of a basic mission of the IMF is expected at the end of March," Akimova, a senior official in the administration of President Viktor Yanukovich, told journalists.
With an eye to the impending arrival of the Fund mission, Akimova said the government would aim to keep the budget deficit for 2010 at no more than 6-7 percent.
"The re-establishment of cooperation with the IMF is one of the key tasks for the government and the presidential administration," she said.
By the end of March, when the IMF mission was due, the government would have a budget draft that could form the basis for discussion, she said. "This requires a budget deficit of no more than 6-7 percent," she said.
The Yanukovich leadership meanwhile stuck to the previous government’s growth estimates for the year, saying it saw gross domestic product growth for 2010 at 3.0-3.1 percent compared to a 15 percent fall in 2009.
This compared with the IMF’s own GDP growth projection of 2.7 percent for Ukraine.
Investors have worried that Ukraine may have problems repaying its short-term domestic debt which it has been issuing in increasing volumes and sky-high yields as the economic crisis takes its toll.
DEBT AUCTION
But demand at a Ukraine debt auction surged this week and yields fell, showing renewed investor confidence in the country and enabling the Finance Ministry to secure enough cash to meet its near-term obligations on existing domestic bonds.
Ratings agency Fitch improved its outlook on its B- rating for Ukraine’s debt to stable from negative on Wednesday, saying the new government’s formation had "lessened risks of a prolonged period of post-election policy uncertainty and further intensification of macroeconomic and financial instability."
The Finance Ministry raised 626 million hryvnias ($78.5 million) at Tuesday’s auctions, while bids hit 9.3 billion hryvnias. Yields fell by 5-6 percentage points compared to the March 2 auction, to 16.0-17.3 percent, depending on maturity.
"Concerns over domestic debt sustainability seem to have been overdone," said Tim Ash, analyst at RBS in London, noting "a growing foreign bid" at the auctions.
A "second week of stellar demand for domestic papers…shows that the government should not have problems rolling over April debt, worth 3.7 billion hryvnia," analysts at Unicredit said.
They forecast that yields could fall as low as 11 percent — less than half of their pre-election levels — once the IMF agreement is signed.
Lower yields in turn will reduce the cost of financing for Ukraine, making its books look healthier in the future.
