First, there was genuine relief that the Verkovna Rada bit the bullet and passed a raft of IMF-related reform bills. Things were looking very, very worrying last week – with the currency in free fall (to under 40) and the economy/financial sector appearing on the brink of a total meltdown. Deputies appear to have pulled the economy back from the brink. And now this should have cleared the way for the IMF board to sign off on the $17.5 billion, four-year loan. It has been “useful” how the hryvnia has rallied back to a level close to the Hr 21.7/$1 assumed in the budget for 2015 – this makes it easier for IMF board members to argue that the program is consistent.
I expect IMF board approval on March 11, and the first tranche of IMF credits of $4.7-$5 billion to follow very soon – split 50/50 for budget and IMF support. I guess there could be an additional $800 million in World Bank credits, and perhaps the second quarter 2015 could see the first tranche of 600 million euros in European Union money (1.8 billion euros total over a year) plus then by mid-year maybe the second $1 billion US loan guarantee. This could push reserves back up into double digits from $6.4 billion at the end of January.
Second, interestingly, while much is made of the divisions between the teams of President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk, through this IMF-reform debate, the two sides appear to have worked well together.
In some respect this is a case of “needs must” but actually also the fact that Oleh Lyashko’s Radical Party and Yulia Tymoshenko’s Batkivshchyna parties appeared to rear their “populist” credentials and stand out against the reforms made it easier for the Yatsenyuk and Poroshenko teams to work/hold together.
Yatseniuk is oft criticized but I think he pulled the rabbit out of the hat by convincing enough deputies for vote for these painful reforms. As one commentator we met said – Yatsenyuk has a knack of focusing on what is important, and explaining difficult things in a simple way. The economic reform team – in my opinion, by far the best in Ukraine’s history – seems to be working well together, and pulling in the same direction, along with the National Bank of Ukraine, albeit as another commentator then said, they have now to deliver.
Third, there has been a surprisingly mute popular reaction to the reforms – surprising perhaps given that the energy sector reforms suggest a tripling plus of gas/energy prices over the next few months. I think the fear was that this could have seen mass demonstrations, but thus far it has not – there have been a few hundred outside the NBU at times, but these are still relatively small scale. Generally I think the answer therein lies in the fact that the bulk of the population understands the need for reform, and accepts that this is about the survival of the state, against foreign intervention and that the country needs to hang together. Interestingly, I think a lot of people typically argue that Russians can endure a lot of hardship for the greater goal of delivering on Putin’s vision of a greater Russia – well the same can be said of Ukrainians, in terms of digging deep to ensure their independence from Moscow. We seem a long way from mass protests yet, and the likes of Tymoshenko and Lyashko as yet do not appear willing to take the risk of leading any such movement – for fear of being branded traitors to the cause of the Maydan.
Fourth, there was recognition that the reform program and indeed the IMF program would likely only work if there was peace in the east – or at least a halt to further Russian escalation. Similarly, I think there was also a recognition that Ukraine will only likely recover market access when there is peace in the east. Most people I met were not optimistic in terms of prospects for the Minsk II ceasefire deal sticking. The consensus seemed to be that major hostilities would resume in the Spring and likely around the city of Mariupol. Hence the Minsk II ceasefire deal was only seen as tactical positioning by Russia. There was also little willingness to give in to Russian demands – rather the resolve to stick it out at almost any cost. A common message/theme still across the board, is that there is no desire by Ukrainians to live in Putin’s Greater Russia, and some things are worth fighting for.
Fifth, there is some concern that recent foreign exchange volatility, and ongoing security concerns, are having a really significant impact on economic activity – and the recession in 2015 could be much worse than the 4-5 percent downturn assumed in the budget for this year. Note therein the last 2-3 NBU activity prints which showed a 20 percent drop in activity. Already dollar gross domestic product is thought to have dropped from $178 billion in 2013, to $115-$120 billion in 2014 and the budget for 2015 seems to assume just $85 billion – so a halving in dollar GDP over the last year, and that could still be on the back of a relatively optimistic real GDP forecast.
Sixth, NBU governor Valeriya Gontareva is constantly facing calls for her resignation – but seems determined to stick it out – and finish the job. Communication from the NBU could certainly be improved, and the management of the foreign-exchange regime over the past couple of weeks did leave a lot to be desired, with flip-flopping in terms of policy. But in other areas the NBU is performing very well – including administrative reform, and bank restructuring. Note in this latter respect the fact that the country’s fourth largest bank (Delta) was taken under SDIF administration this week – a politically painful move. Indeed a total of 11 banks were sent by the NBU for resolution in 2015 already, and 34 over the past 12 months. A bank owner responsibility bill was also part of the IMF reform package approved by the Rada – key to addressing issues related to connected-party lending. And in terms of bringing in a competent/credible team, Gontareva is doing extremely well – she is creating/filling a high quality bench of deputy governors/heads of dept, etc, all with significant private sector activity. In the end Gontareva is a manager and a good manager are the ones who hire the right people, and then delegate – accepting their own weaknesses/deficiencies. I think Gontareva gets high marks in this latter respect. Even on the FX front, it is difficult to manage a regime when you have little in terms of reserve cover and Western support has been slow in coming – presumably the IMF is also providing significant input, so has to take some of the flak therein.
Seventh, the administration (from public statements) seems adamant that talks with foreign private sector creditors will get underway after the IMF board signs off on the EFF on March 11, so presumably the week later. My sense still is that the Ukrainian authorities are going into talks with a very pragmatic and open minded approach, and that this will be a negotiation, obviously with the national interest top of the agenda. I sense also that the IMF will adopt a relatively hands-off approach – I buy their official line that they have set the Ukrainian authorities the task of filling a $15 billion financing gap for the duration of the IMF loan, and it is up to the Ukrainian authorities how they fill it within the constraints that any deal has to ensure debt sustainability/solvency.
The Ukrainian authorities are certainly not adopting an ideological approach – it is not about penalizing creditors, but there has to be understanding that a halving of GDP means that Ukraine cannot support/service the same level of debt, and creditors need to be understanding of this, and especially also when the country is fighting for its very survival. . I think it is also recognised that in the most likely scenarios, early market access will be difficult to achieve – key there will whether the conflict in the east is quickly resolved.
