IMF Board Approves $15.2 Billion Loan to Ukraine

The International Monetary Fund approved a 2 ½-year, $15.2 billion loan program for Ukraine, which agreed to trim its budget deficit and raised natural gas prices to qualify for the funds.

The IMF board of directors agreed late yesterday to disburse $1.9 billion immediately, with subsequent payments subject to quarterly reviews. Ukraine can use $1 billion of the first payment to help cover the deficit, Thanos Arvanitis, the Washington-based lender’s Ukraine mission chief, said today on a conference call with reporters.

“Ukraine is emerging from a difficult period during which the economy was severely hit by external shocks and exacerbated by domestic vulnerabilities,” John Lipsky, the fund’s first deputy managing director, said in a statement. “Authorities are committed to addressing existing imbalances and putting the economy on a path of durable growth.”

Ukraine got a two-year, $16.4 billion loan from the IMF in 2008 after the global recession cut demand for its exports. The nation received $10.6 billion before payments were frozen in November as the government declined to cut spending ahead of presidential elections at the start of this year.

The government this month increased gas prices for households and heating companies to balance finances of state energy company NAK Naftogaz Ukrainy. Under policies attached to the new loan, the consolidated general government deficit has to reach 5.5 percent of gross domestic product this year and 3.5 percent next year.

VTB Loan

Ukraine in June received a $2 billion loan from VTB Group, Russia’s second-largest bank, to help cover the deficit.

“We expect that the first tranche from the IMF will be used to finance the budget deficit and, in particular, to refinance a $2 billion loan received from VTB,” said Anastasia Golovach, an analyst at Renaissance Capital in Kiev in an e-mailed note.

The IMF will provide a second $1 billion for the state budget after the first quarterly review, Arvanitis said. The remaining $13 billion will go to central bank reserves, he said.

The loan “eases concerns over budget financing for this year,” said Tim Ash, head of emerging market research at Royal Bank of Scotland Plc in London, by e-mail today. The program “should enable rational energy pricing, which will do much to help rein in the quasi-fiscal deficit in the energy sector.”

Ukrainian Gas

Prime Minister Mykola Azarov initially aimed for a deficit target of 5.3 percent of GDP plus 1 percent to cover funds for state-run energy company NAK Naftogaz Ukrainy. The IMF said it wants Ukraine to reduce the budget deficit to 2.5 percent of GDP in 2012. Naftogaz’s deficit should be “eliminated starting from 2011,” according to the statement.

Resumed cooperation with the IMF opens the way for a European Commission loan estimated at 610 million euros ($792 million) and for an $800 million loan from the World Bank, Deputy Prime Minister Serhiy Tigipko said on July 7.

“Fiscal adjustment will start in 2010 and deepen in 2011-12, backed by robust structural reforms of the pension system, public administration, and the tax system,” Lipsky said. Ukraine’s gas industry “will be strengthened, including through domestic price hikes and broader reforms supported by other multilateral institutions, which will help eliminate energy subsidies and create a more modern and viable sector.”

Market Strength

The benchmark UX stock index rose 70.13 points to 2093.85 today, the biggest increase since July 6. Ukraine’s 6.58 percent bond maturing 2016 rose to 101.053, from 100.000 yesterday. Ukraine’s credit default swaps fell 4 basis points to 514.5, according to data provider CMA.

The IMF action “will be moderately positive” for Ukraine’s Eurobonds “as the approval of the stand-by program has been expected and the market has already accounted for this,” Astrum Investment Management said today in a comment for clients.

The decision should cause a further decline in the cost of hedging against devaluation risk, Astrum said. This “should increase the appeal of the Ukrainian domestic bond market for non-residents,” according to Astrum.

Tigipko said in March that Ukraine needed IMF support to bolster the economy, which shrank 15.1 percent in 2009, the biggest contraction since 1994. GDP expanded 4.9 percent in the first quarter, according to government figures.

Standard & Poor’s said July 22 it may raise Ukraine’s credit rating for a third time this year, boosting it to B+, after the government reaches agreement with the IMF.

“We expect Ukraine’s sovereign increases should follow the IMF decision,” Astrum Investments said today.

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