IMF support for Kiev mooted on deficit fears
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Emerging Markets

IMF support for Kiev mooted on deficit fears

Ukraine, which has spent $1.6 billion in the last ten days refinancing banks, is a logical candidate for IMF emergency funding, sources in the local market believe.

The National Bank of Ukraine is expected to focus on supporting banks – which collectively have $2.8 billion of foreign debt falling due in the fourth quarter – rather than on supporting the hryvna exchange rate.

Ukraine’s current account deficit has tripled to $7.7 billion, from about $2 billion a year ago. Analysts reckon that a further $4-5 billion could be added next year by an expected sharp rise in the price of natural gas imported from central Asia.

Geoffrey Smith, a Kiev-based independent financial analyst, said in a telephone interview: “The budget deficit is at 1.9% of GDP and will increase. But that’s not catastrophic. A much bigger problem is the external debt position. I would expect Ukraine to go cap in hand to the IMF for a stabilization credit.”

On Friday, the pricing of credit-default swaps on Ukrainian state debt jumped from 523 basis points (bps) to more than 1000 bps – a level charged to creditors perceived as “distressed”, and the highest for any European country. The yield on government bonds due in 2015 surged to 16% from 4.95%.

Worries about Ukraine’s fiscal position are exacerbated by its latest political stalemate. On Wednesday evening president Viktor Yushchenko dissolved parliament and called elections for December, after efforts to re-form the ruling coalition between his supporters and those of prime minister Yulia Timoshenko failed.

A Kiev-based executive from an international bank told Emerging Markets that, with $50-60 billion of external liabilities next year – $20 billion of long-term debt, $15-20 billion short term to be rolled over and $15-20 billion on the current account – Ukraine could well be a candidate for an IMF loan. “But the Fund will not negotiate unless and until a government is in place, and that could well take until March.”

The hryvna fell to 5.9 to the dollar in trading on Wednesday, but rebounded to 5.2-5.3 by Friday. “It’s pretty near to its equilibrium level. Clearly external demand for the hryvna will fall; a bigger question mark is over domestic demand, as Ukrainians will want to hold their savings in dollars or euros”, Smith said.

The central bank last week took over management of Prominvest Bank, the country’s sixth largest, and imposed a sixth-month moratorium on payments to its creditors. Nadra bank and Alfa Bank Ukraine were among others reported to have received refinancing.

A Kiev-based banker told Emerging Markets: “I see Ukraine as a logical candidate for IMF funding. Its external position is vulnerable and the crisis is clearly hitting the real economy. Steel production is down substantially, construction has ground to a halt and people are selling real estate.”

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