October 26, 2008 / 7:35 PM / 11 years ago

SNAP ANALYSIS: Ukraine, IMF agree on $16.5 billion loan

KIEV (Reuters) - Ukraine agreed a $16.5 billion standby loan with the International Monetary Fund (IMF) on Sunday to help shield it from the global financial crisis by bolstering its currency reserves and propping up the banking sector.

WHAT’S THE DEAL?

* The IMF can provide the standby facility, providing Ukraine’s parliament passes certain financial measures, including balancing the budget and introducing reforms that would support the banking sector.

* The standby facility is valid for 24 months and Ukraine does not necessarily have to draw on it.

DIFFICULTIES AHEAD?

* Ukraine is in the midst of the latest bout of political turmoil which has gripped the country virtually since President Viktor Yushchenko was swept to power by mass “Orange Revolution” protests. The ex-Soviet state now faces its third parliamentary election in as many years.

* Yushchenko dissolved parliament this month after the collapse of a coalition of two groups in parliament led by him and Prime Minister Yulia Tymoshenko, his ally from the 2004 Revolution, now at odds with him. Tymoshenko opposes the election.

* Yushchenko issued a decree for a December 7 election, but suspended it last week to enable parliament to pass financial legislation that includes the IMF’s demands.

* But parliament, which has a long history of fractious behavior, was blocked last week by Tymoshenko’s supporters who oppose any move to link the financial legislation with financing for the election. Parliament is scheduled to sit again on Tuesday and chairman Arseniy Yatsenyuk says failure to pass the packages could imperil the IMF deal.

DOES UKRAINE NEED THE CASH?

* Analysts worry about Ukraine’s ability to refinance debt at a time when hardly any banks are lending.

* Estimates of how much debt is due in the short term vary. Yushchenko said total debt due until the end of the year amounts to $8.8 billion. The central bank said total debt due in 2009 totals $15 billion.

* Some analysts see the figure, which includes the current account deficit and government debt, much higher at $55-65 billion.

* At the same time, the hryvnia currency is weakening under the weight of the current account deficit. The central bank so far has dipped into its reserves of about $35 billion to support it. The question is, how much is it willing to spend?

* Tymoshenko said the loan would be used partly to increase reserves and partly to help the banking sector. A top adviser to the central bank said the loan was not needed to pay off next year’s debts.

IS IT GOOD NEWS?

Analysts have said the size of the loan is adequate for now, though they consider the added credibility it will give Ukraine’s financial sector to be more important.

“In terms of the figure, it’s on the higher side of what was mentioned by key politicians in Ukraine. However, this is not such a big fund that it will solve all the problems in one swoop,” said Martin Blum, head of EEMEA Economics and Strategy at UniCredit bank.

“The immediate focus is to actually stabilize the banking sector and also to ensure that sentiment of the local population also stabilizes to prevent a run (on the banks).

“The deal should be used by the government to push through the necessary changes. I guess politicians would fall in line. But this country can confound what the logic suggests.”

Analysts said conditions attached to the loan were the chief benefit — forcing onto Ukraine a financial policy anchor at a time of constant political crisis that will promote fiscal prudence and help right the balance of payments.

However, Ukraine still faces tough times.

Some are expecting a hard landing for the economy next year. They say the currency should be allowed to weaken to close the current account gap while external debt obligations may still be tricky to manage as the global crisis continues. (Compiled by Sabina Zawadzki; editing by Michael Roddy)

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