Ukraine and Serbia, struggling with budget and current-account deficits, need to secure aid from the International Monetary Fund in the coming quarters, while Slovenia and Croatia may be next, UniCredit Bank AG said.
Ukraine may strike a deal with the IMF by March because a free-trade agreement with the European Union, budget cuts and the introduction of currency flexibility are helping President Viktor Yanukovych’s re-election chances, Gillian Edgeworth, an economist at UniCredit in London, said today. Budget consolidation needed for Serbia to clinch an arrangement with the Fund may be held back by the probability of an election there early next year, she said.
Ukraine must quickly correct economic imbalances, as its budget shortfall may exceed 6.5 percent of annual output this year, while the current-account gap may total 8 percent, the World Bank said on Oct. 7. Serbia’s cabinet yesterday announced steps to bring the public-finance deficit and debt under control by 2017 after talks with IMF broke off in May.
“Policy challenges in Ukraine and Serbia have many similarities,” Edgeworth, UniCredit’s chief economist for emerging Europe, the Middle East and Africa, said in an e-mailed note. “Both countries run some of the widest twin deficits globally in the face of structurally weak growth and insufficient currency flexibility.”
Ukraine’s foreign reserves stand at 3.3 months of imports and 65 percent of short-term external debt, while Serbia’s public spending has grown by more than 5 percentage points from 2008 to 2012 to reach 50 percent of gross domestic product, increasing the difficulty for both countries to attract foreign funding from elsewhere, UniCredit said.
Agreements with the Washington-based fund have helped financial stability in Romania and Poland, including when investors withdrew funds from emerging markets in July and August, UniCredit said. Ukraine’s and Serbia’s efforts to secure loans with China and the United Arab Emirates, respectively, won’t secure a lasting solution for either, Edgeworth said.
Slovenia and Croatia “are also in need of an external anchor” as budget deficits are trailing authorities’ plans, with Croatia struggling to return to economic growth, Edgeworth said. Slovenia’s original 1 billion euro (1.35 billion) limit on government help to the country’s mostly state-owned banking industry “is likely to prove much too small,” while the size of a bailout “is much more manageable for Europe than is the case for Spain or even Ireland,” she added.