IMF mission recommends $15 billion loan to Ukraine
Following two weeks of negotiations with Ukrainian authorities in Kyiv, the International Monetary Fund’s Ukraine mission recommended that the Fund’s Executive Board approve a new $14.9 billion stand-by lending program for the country. The IMF Board will consider the 2.5-year loan at the end of July after Ukraine enacts unspecified legislative changes related to the budget and the financial sector. Other IMF requirements include limiting the gap in government finances to 6.5 percent of GDP in 2010 and 3.5 percent of GDP in 2011 by reforming the tax and social security systems, improving tax administration and carrying out energy reforms. The IMF’s approval of a new lending facility will be extremely positive for the Ukrainian economy, alleviating short-term financing pressures and facilitating access for the government and the private sector to other external financing sources, including the Eurobond market. The new lending program will substitute for the 2008-approved $16.6 billion stand-by loan of which Ukraine had received almost $11 billion by July 2009 before the Fund suspended disbursements due to lack of reforms.
Consumer prices fall for third month
Consumer prices in Ukraine declined for the third straight month in June, slipping 0.4 percent compared to May and bringing annual inflation down to 6.9 percent, a four-year low. In line with previous months, food prices paved the way for deflation in June, sinking 0.4 percent month-on-month (but remaining up 8 percent year-on-year) on seasonal declines in dairy and vegetable prices. Despite the rapid deceleration in consumer inflation over the past several months, analysts expect prices to pick up in the second half of the year due to recovering consumer demand fueled by the country’s economic recovery and increasing welfare spending from the state budget. Year-end inflation will also depend to a large extent on the pace and magnitude of long-discussed increases in gas tariffs for households and heating companies, which is reportedly one of the conditions the International Monetary Fund wants fulfilled before approving a $14.9 billion lending program for Ukraine.
Fitch upgrades Ukrainian ratings
International rating agency Fitch Ratings upgraded Ukraine’s sovereign long-term foreign and local currency ratings to B from B- following the Ukrainian government’s agreement with the International Monetary Fund on a new lending program. Fitch said the IMF’s lending support would reduce the risk of macroeconomic and financial instability and improve the country’s creditworthiness while unlocking funds from other international financial organizations. The upgrade put Ukraine almost on par with Georgia, which has a B+ from Fitch, and two notches below Russia, which is rated BBB, the lowest investment grade rating on Fitch’s scale. Another major global rating agency, Standard & Poor’s, upgraded Ukraine to B in May.
Public debt slips in May
Ukraine’s public debt inched down 0.8 percent in May, to $40.9 billion, equating to 30 percent of the country’s gross domestic product (GDP). Domestic debt rose 0.7 percent to Hr110 billion over the period as the government continued issuing domestic bonds to finance the budget deficit. External debt remained on a downward trend due to scheduled redemptions. However, analysts expect Ukraine’s public debt to surge in the second half of the year as the government will have to intensify foreign borrowings, both from international financial organizations and corporate lenders, to plug its budget deficit. Ukraine was to start a roadshow in the U.S. and Europe this week to market a $2 billion 10-year Eurobond. Still, the country’s end-2010 debt level, forecast at $57 billion or 40 percent of GDP, is set to remain relatively low by international standards. For example, European Union members are required to have a debt-to-GDP ratio of no more than 60 percent, but 12 out 27 EU member states were in violation of this criterion in 2009, led by Italy and Greece each with a debt level of 115 percent of GDP.
