LONDON Oct 17 It will be a jittery 18 months
for Ukraine's international creditors, who are weighing up its
$60 billion-plus debt repayment schedule against its
fast-diminishing hard currency reserves.
Ukraine's presidential election in early 2015 is the focus
for investors, who reckon the government will then be willing to
sign up to a desperately needed loan from the International
Monetary Fund. Before that, though, it would prefer to scrape by
rather than accede to the IMF's politically difficult demands.
The country's debt problems shot into the spotlight this
month when its state oil firm Naftogaz narrowly escaped default
-- not through lack of cash but because of action by a
U.S.-based creditor which successfully petitioned a UK court to
seize a bond coupon payment in lieu of an old $22 million debt.
Ukraine paid the $22 million again to avoid default. But it
could ill-afford the extra payment, given central bank reserves
are barely above $20 billion -- less than enough for three
months of imports.
And many more payments loom. Over $60 billion, or a third of
the country's GDP, is due in the coming year, central bank data
showed at the end of July. Of this the state owes $7 billion.
Add to this a $10 billion hole in the balance of payments,
an economy stuck in recession and a government that plans to
issue promissory notes in lieu of budget arrears, and it's easy
to see why investors are worried.
With the exception of hedge funds and opportunists keen on
the high yields, most have ducked out, an exodus that gathered
speed last month as Moody's cut Ukraine's credit rating to Caa1
-- seven notches in junk territory.
"It's very simple. They are supposed to have $60 billion in
maturing debt and $20 billion in reserves," said Okan Akin, an
emerging markets analyst at asset manager Alliance Bernstein.
"Even the healthiest Ukrainian company will find it
extremely hard to refinance external debt before the sovereign
sorts out its situation."
Swap markets currently rate Ukraine's default probability
over the next five years at 50 percent, next only to Argentina,
while a jump in short-dated bond yields and debt insurance costs
reflect fears of an impending default
For its part, the central bank says Ukraine will meet its
foreign debt repayment obligations on time despite the decrease
in its foreign exchange reserves.
What are Ukraine's options?
An International Monetary Fund loan would at a stroke
resolve many of the problems, putting cash in the bank and
reassuring global investors. But the IMF's loan conditions --
currency flexibility and cutting energy subsidies -- will be
unpalatable to a government facing elections in 2015.
Russia, Ukraine's main source of energy and bank loans, has
been angered by Kiev's efforts to cosy up to the European Union.
Export revenues are down, along with prices for steel, which
comprises a quarter of Ukraine's exports. And if C-rated
Ukraine were to issue Eurobonds, it would have to pay 10
percent-plus yields to induce investors to buy.
The IMF starts a 10-day visit to Kiev this week but analysts
are pessimistic about a loan deal before the 2015 election.
"The only thing which could force an early programme is if
the hryvnia cracks, and Ukraine ends up going into a full blown
balance of payments crisis, pre-election," Standard Bank analyst
Tim Ash said, referring to the tightly controlled currency.
"Given Ukraine's fundamentals that's not a low probability."
Without an IMF deal, what stands between Ukraine and default
is the central bank's reserve chest.
While reserves have fallen by a third in the past year and
are well under total maturing debt obligations across the state
and the private sectors, analysts reckon the government can at
least muddle through until 2015.
"Our base case is there will be enough cash to service next
year's obligations but ... there is going to be a significant
drain on FX reserves," Barclays strategist Andreas Kolbe said.
Reserves could fall to $11-$12 billion by the end of 2014,
Kolbe reckons, while Unicredit analysts are more pessimistic,
predicting they could even crash below $5 billion.
The reserve depletion shows Ukraine is "increasingly running
out of ammunition to maintain even a sub-optimal status quo,"
they said in a recent note.
On the plus side, Ukrainians have $23 billion in hard
currency bank savings that the state can tap via domestic dollar
bonds. Such issuance has raised over $3 billion this year.
Much will depend on the global bond market too, Kolbe says.
"Can they maintain status quo for 15 months until the
election? It depends on ... whether there will be a window of
opportunity to issue Eurobonds," he said
Ukraine's high yields may well persuade bond buyers to
overlook its troubles. Max Wolman, a fund manager at Aberdeen
Asset Management, says Ukraine makes up over 3 percent of the
EMBI Global, the main emerging debt index and excluding it from
a portfolio is not easy.
Wolman predicts, first, that creditors, including the IMF
could grow kinder to Ukraine after the expected Nov 28 signing
of political and trade deals with the EU. Second, he expects
that billions of dollars in outstanding loans and trade links
will dissuade Russia from pushing Ukraine into bankruptcy.
Also, a third of the short-term debt burden is comprised of
trade credits which tend to be rolled forward, he notes.
"I am not saying Ukraine is a great credit but they have the
ability to kick the can down the road and avoid default,
whether they get money from Europe, from markets or Russia," he
And, if faced with the worst, there is always -- the IMF.