 |
The IMF’s ability to propel governments into making structural reforms is being tested to the limit in Ukraine. On July 28 the IMF approved a second, $15 billion, loan programme – which, broadly, doubles the chances that president Viktor Yanukovich’s government will stick to promises to rein in spending. At stake in this gamble is not only the IMF’s post-crisis credibility, but also the fragile recovery of Ukrainians’ living standards, which has hung in the balance since the 2008 financial crisis.
The IMF’s measures are unpopular – triggering warnings of a resurgence of social protest [see box p. 27] and leading sceptics to question whether Yanukovich will hit numerous reform targets, in particular to overhaul pensions and reform the energy sector. Some of the IMF’s critics argue that the pro-cyclical nature of the package will further damage Ukraine’s stuttering economic rebound.
The package includes stringent fiscal and macroeconomic indicators, and tight timetables for progress on structural reforms – mainly, raising gas and heating prices, reforming the gas sector and the pension fund [see box below], and completing bank restructuring.
For 2010, the budget deficit is set at 5.5% of GDP (compared to 8.8% in 2009), plus a deficit for Naftogaz, the state-owned gas company, of 1% of GDP (compared to 2.5% in 2009). Floors have been set for net international reserves, publicly guaranteed debt and other indicators.
A limit has been placed on the level of arrears for VAT refunds – an issue that has stoked friction between successive Ukrainian governments and exporters – of 3 billion hryvna ($380 million) in September, falling to zero by the end of the year. Most of the 16.4 billion hryvna arrears accumulated last year, and 9 billion hryvna this year, is being repaid in the form of special Treasury bonds, the first of which were distributed in August.
POOR BUDGET PERFORMANCE
Anastasia Golovach, economist at Renaissance Capital in Kiev, says that budget performance “remains poor and may be the main challenge for the authorities”. She believes that the quantitative indicators used by the IMF are set up in such a way that failure to meet one could trigger breaches of others. “There is also no room for Ukraine to manipulate statistics on budget performance and government borrowings, as was done last year,” she says.
Even those observers who think Ukraine will fulfil the fiscal requirements are doubtful about implementation of structural reforms.
Barbara Nestor, an emerging market analyst at Commerzbank, says many of the toughest measures – acceleration of gas price rises for households, for example – are already timetabled for 2011, and “with these structural issues that are by nature long term, the government will delay implementation wherever it can.
“The government will hope to delay sufficiently that it can move funding requirements to the markets, which are much less rigorous than the IMF.”
Andreas Schwabe, a research analyst at Raiffeisen Zentralbank Austria, says: “The fiscal deficit should be controllable. But the long-term structural reforms will be much more difficult, because they will be unpopular.” Raiffeisen sees the main potential risks in Ukraine as a terms-of-trade shock brought about by unfavourable changes in steel and other commodity prices, and a possible failure to implement the IMF programme.
The IMF says government actions even before the programme was adopted – including a 50% increase in household and utility gas tariffs from August 1, amendments to the 2010 budget and measures to reinforce central bank independence – show that Kiev is serious about implementing the programme.
Thanos Arvanitis, IMF mission chief for Ukraine, tells Emerging Markets: “Yes, there was some scepticism from the market about the authorities’ economic reform plans before the loan programme. And now it’s up to the government to stick to the timetables laid down. But the markets were pleasantly surprised by the prior actions taken.”
Ukrainian officials met bankers in July, while the IMF loan was awaiting final board approval, to discuss a possible $1–2 billion Eurobond issue – but were dissatisfied with the pricing on offer and decided not to go ahead. At the time, finance minister Fedir Yaroshenko said an 8.5% interest rate was too high.
Arvanitis points out, “There was no lack of supply: investor interest was there.” He believes that the IMF deal in place improves Ukraine’s position with regard to future market borrowing.
INTRUSIVE PROGRAMME
While the market is sceptical that Ukraine will be able to implement the tough structural reform targets, civil society critics of the IMF argue that it had no business setting them in the first place.
Mark Weisbrot, co-director of the US-based Centre for Economic and Policy Research and a long-time critic of pro-cyclical lending by the IMF, says: “Why should the IMF be in the business of imposing structural reforms? It’s supposed to be concerned with balance-of-payments support and fiscal issues.”
Weisbrot says the programme is “quite intrusive: it seems like overkill, with Ukraine’s public debt at 39% of GDP, half the European average”.
The IMF says the only structural reform elements in the programme (mainly gas sector and pensions reform) directly affect the budget and the financial sector.
Arvanitis of the IMF says: “It’s not a wide structural reform agenda covering, for example, industrial or agricultural policy. It’s very specifically on fiscal issues and the banking sector.” The steps to be taken were set out by the government in April, but, says Arvanitis, during talks with the IMF over the summer, “the timing of some measures was brought forward.”
Ukraine, which last issued a Eurobond in November 2007, is likely to return to international markets this year and next to supplement borrowing from the IMF and other multilaterals.
The government projects a consolidated deficit (including the budget, Naftogaz deficit, bank recapitalization bonds and the VAT bonds) of about 9% of GDP (95 billion hryvna) this year. Nestor at Commerzbank estimates that one-third of this will be financed by the IMF, World Bank and other multilaterals.
“But even with this help, and, let’s say, a $1.3 billion Eurobond placement later this year, Ukraine would have to continue to tap the domestic debt supply for about 24 billion hryvna in the second half of the year, including 16 billion hryvna in VAT bonds,” says Nestor.
Nestor says the IMF’s presence “puts the government in a better position to shift financing to external markets. This is likely to be necessary to support solvency in 2010–2011.”
The IMF is centre stage – but there’s more than a walk-on part for the markets. But whether the drama ends happily, or in tragedy, will depend more than anything on Ukraine’s economic recovery and how it is treated by commodity cycles.