And that is I am afraid a sad indictment of the current lack of leadership and focus in the West.
Indeed, this loan represents just under $6 billion in new IMF money, but leveraging another $7.5 billion in new money from other sources, including the United States, European Union and World Bank.
So I guess it is more like $13.5 billion in really new money to be disbursed over the next few years – set that against the tens of billions thrown at Greece. Actually this new money might not have been required if the West had put its money where its mouth was over the past six months and actually ensured that Ukraine did not financially fail.
The reality is that it has financially failed, as reflected in the 70 percent odd exchange rate depreciation, deep deep recession, and the move now to restructure its external debt liabilities which is a default by anyone’s language.
As one analyst noted yesterday this IMF package should ensure no disorderly default scenario, but it is still a default. That said, default/restructurings can be positive, they can be part of the solution, and indeed the IMF is calling for $15 billion in burden sharing which, frankly, is long overdue in Ukraine’s case.
The plus is that Ukraine now has the best set of reformers in government for any point over the past two decades, and indeed I would stack this team up against the best and brightest in the region. They get the need to reform, and are driven to reform on that agenda, plus they have a population that desperately wants the country transformed into a normal functioning Western market democracy and seem willing to take some of the pain needed to get there – note the relatively muted reaction to energy price hikes announced last week.
The only questions are:
a) will Russia stay out and let the country develop on the course that the bulk of the population appear to have chosen;
b) will the West do enough the support Ukraine economically/financially and also to encourage Russia to adopt at best a neutral approach towards Ukraine. Hence now likely whether Ukraine succeeds or fails depends as much on decisions taken by outside players. But failing to push ahead with a reform agenda now would give the West an excuse from not providing the financing that Ukraine so desperately needs;
Reviewing some of the details of the program that are leaking out, it is notable that the fund assumes a 5.5 percent real gross domestic product contraction this year. This seems reasonable in a scenario where the conflict in the east halts, but could easily end up with a much deeper recession if we see a resumption in fighting.
Government forecasts suggest so that in the latte scenario the real GDP decline could be double digits, in which case the current IMF program will likely unwind, as was the case with the standby arrangement. It is important again to stress that as important as this financing package is, the West needs to work to ensure no further Russian interventions in eastern Ukraine.
I was struck by the leak of an assumption of a 94 percent public sector debt/GDP by the end of 2015, which was, remarkably, spot on my own forecast.
I had assumed another $10 billion in public sector debt with Western credit disbursements on top of the $70 billion existing stock.
Nominal GDP is put at something like $1,850, with an exchange rate of 21.7 this gives dollar GDP of $85 billion, down from $178 billion in 2013.
$80 billion divided by $85 billion gives 94 percent.
Not sure if one should add a few percentage points for bank recapitalization costs, but ballpark 94 percent seems reasonable as compared to around 72 percent at the end of 2014, and around 40 percent in 2013.
Suffice to say this ratio is very dependent on growth/exchange rate assumptions, plus also the conflict scenario in the east.
Getting down to 70 percent by 2020 as seemingly targeted by the IMF will likely be fairly challenging without a haircut on public sector debts, but as Fitch noted this week, the authorities might try a gentler reprofiling first, until they can figure out where the conflict situation is heading. They may also want an early “easy” win with creditors to keep up the good news momentum, and an early agreement with private sector creditors might defer that – albeit it is unlikely to deliver early market access any time soon. But reprofiling might still be just buying time, until an eventual haircut scenario down the line. The authorities might hence just opt to try and get this out of the way now, and indeed getting to the 70 percent target might be made a little easier by moving for a haircut sooner rather than later – it will also ease somewhat pressures on fiscal consolidation/adjustment. I still sense though that the Ministry of Finance is open minded on this, with negotiations with creditors due to start next week – the ministry is holding an investor call tomorrow to discuss some of these themes presumably.
Timothy Ash is head of emerging market research for Standard Bank in London.
