It was ironic today to be reading comments from a large Russian state-owned bank saying that Ukraine’s passage of the anti-bank fraud legislation in Ukraine is good news, and expect more good news to come!
It leaves me thinking, what do these guys know that I don’t?
But this is good news, really it is, but it’s been like pulling teeth to get there. Remember this was promised back last autumn – Ukraine has been through three finance ministers since then!
It should now bring International Monetary Fund board approval for the $5 billion standby arrangement loan and likely the release soon thereafter of the first $1.75 billion credit tranche from the fund, plus then the World Bank, European Union, and other international financial institution monies. The one caveat herein is that the fund will want to read the fine text of what was actually passed to ensure that – Ukrainian style – some last-minute amendment was not introduced to change the whole character of the bill.
Thinking through Ukraine’s story, though, it is looking pretty mixed:
(+/-) The banking bill was passed but billionaire oligarch Ihor Kolomoisky will undoubtedly challenge it in the Supreme Court and I think there is a high likelihood herein that the judges will throw it out on the grounds that it is unconstitutional. I think the IMF recognizes the risks herein but I think the view is that the law is good enough as is to shield PrivatBank from the clutches of Kolomoisky and that they will deal with any subsequent Supreme Court ruling further down the line when it happens. They leave to fight another day with this bill.
(+/-) The land reform bill was passed, but it was watered down to be a shadow of its former self and we are left thinking, so what? This is going to have a minimal impact – whereas the hopes were from the previous more radical plan that it could be transformational with a big positive hit to real gross domestic product growth. That is not going to happen now.
(-) Zelensky has fired a slew of reform ministers, including the heads of the customs and tax authorities and the Prosecutor’s General Office. Firing the heads of the tax and customs authorities might have been justified given that he also changed the minister of finance – twice, but why also remove their deputies? At a critical time, this has thrown these key institutions into a state of uncertainty, to say the least.
(+) The National Bank of Ukraine has had a good crisis, and I think affirmed its status as the primary reform institution in Ukraine. I think they have managed monetary and exchange rate policy well through this crisis. They lost some reserves in defense of the hryvnia, but not of a scale to worry about macro-financial stability. They cut rates early, and against market consensus, and that proved to be the right call. And amazingly the hryvnia has been relatively stable during this whole COVID-19 crisis. No run on the exchange rate or banks – and I think this is a great testimony to reforms undertaken by the NBU over the past five years. I hope that this will pushback on those in the presidential administration who want to roast the golden goose which is the NBU, by making far-reaching management changes. This would be a disaster if followed through on. Hands off Yakov Smoliy and the NBU is a clear message from the market.
Interesting to hear the debate in Ukraine, suggesting that the IMF should have upsized the program given the assumption of enlarged financing needs this year given COVID-19 related risks.
I am not sure that is the case, as in Ukraine’s case the problem is not money but policy. With the right policy stance, Ukraine will have market access – and the problem at present is not the money, it is the perception of the broader policy stance going backward.
Therein, I would just highlight the idiotic move to sack the economy team in the middle of IMF talks and the COVID-19 crisis, backtracking on the prosecutorial reform and the anti-corruption agenda, and the changes at the tax and customs authorities. As I have written previously, I think President Volodymyr Zelensky has had to make political compromises to get key votes like the banking and land reform bill through the Verkhovna Rada, given foot-dragging has seen the Servant of the People majority evaporate. These compromises have been to other oligarchic groups, in order to fight Kolomoisky. But that means a weaker momentum towards structural reform. I guess that is what the IMF accepted by moving from a longer-term loan to a shorter duration standby arrangement. I think the fund is saying that we now see much more limited scope for landmark structural reforms given the compromises noted above and COVID-19, so let’s just consolidate or tread water with an standby arrangement and regroup 18 months down the line and figure out what structural reforms are possible then. I guess the problem with this is that 18 months down the line Ukraine will be getting into election season, and then the chances of meaningful structural reform are limited.
Interestingly herein that Bahrain, which has much more onerous debt ratios and financing challenges, managed to successfully come to market this week and borrowed $2 billion at 6.25-7.375%.
With the right messaging about reform, with the IMF program in place, then Ukraine can tap the eurobond market again.
And the local market has also recovered – and with the same reform message/IMF program in place, the Ministry of Finance can tap domestic and foreign liquidity for local debt issues in hryvnia or dollars.
But key is Zelensky not messing around again, changing the cabinet, and scoring own goals on the reform front. It might be nice if Zelensky also spent some time with the international investment community to reassure them on his reform credentials – most investors are long Ukraine risk already, so give them some additional reassurance.
And therein hiring Mikheil Saakashvili, the former Georgian president, as a reform clarion does not really call to muster – questions therein whether he has the authority or political capital to do very much in his new role as head of the national reform council. Sounds a bit of a gimmick.
