Ukraine’s gross external debt continued to increase in 2011, rising by 7.6 percent compared to 2010, or $8.9 billion, bringing the cumulative total to $126 billion, Kyiv's Dragon Capital wrote in a March 21 note to investors.
There is no reason to panic, however, as Dragon Capital points out that debt as a percentage of gross domestic product declined by 9.5 percentage points – to just 77 percent of GDP, both public and private.
The increase in total debt was largely due to more corporate borrowing. Combined liabilities by businesses increased by $7.1 billion, reaching a net $50 billion.
Looking ahead, Dragon Capital cited National Bank of Ukraine figures in estimating that the nation’s debt repayments due this year stand at $57 billion.
That’s a massive amount. If repaid, the pressure to devaluate Ukraine’s currency, the hryvnia, would be immense.
But, according to Dragon, only a small part of the amount due this year will be actually repaid, because the “a large share” of the corporate borrowings in 2011 were “related-party lending” and could be easily refinanced.
The largest redemptions, according to Dragon Capital, will come from commercial banks; the central bank will also need to cover loans falling due to the International Monetary Fund.
In the end, debt as a percentage of GDP may even decline to 71 percent by year’s end, Dragon concluded.
What to make of the mixed results?
“Ukraine is a particularly difficult call to make at the moment,” according to Timothy Ash, managing director of emerging market research at Royal Bank of Scotland.
Analyzing the country’s fiscal position in a note, he wrote: “On a stand-alone basis its credit quality is clearly deteriorating in my view.
The current account deficit ended 2011 at around $8.5 billion, and is unlikely to decline much in 2012, given likely fiscal pump-priming ahead of elections and expectations of higher energy costs.
Official foreign-exchange reserves declined from their peak of around $37 billion in April 2011 to just $29.8 billion at the end of 2011, albeit showing relative stability in the final few months of the year, after hefty reserve depletion in Q3 2011.”
According to Ash, Ukraine’s overall sovereign debt burden “is not that high, but it faces a weight of external debt liabilities ($2.5 billion) falling due in June, plus it has to cover around $3 billion in debt owed to the IMF.”
Ash said: “The government has already signaled that it would like to reschedule debt liabilities to the IMF, which is hardly a reassuring message to investors more generally Any such rescheduling to the IMF would require the government to bring the existing [$15.6 billion IMF loan] program back on track.”
But this “seems difficult to imagine given that the government has ruled out household gas price hikes which have thus far been set as a key prior condition by the IMF to get the program back on track.
Other comments from various government ministers and officials that the government wants to boost social payments this side of the elections suggests that the government is in no mood for likely harsh IMF conditionality,” Ash added.
Pointing to political strains between Kyiv and Brussels over alleged political persecutions of President Viktor Yanukovych’s rivals, and with Moscow over natural gas import prices, Ash concluded that investors and banks would seek to be “adequately compensated for the risks” if they are to help Kyiv roll over debt this year through Eurobond placements in syndicated loans.
