Help can’t come fast enough for Ukraine.
Conditions are deteriorating so quickly that the International Monetary Fund’s $17.5 billion bailout, pledged less than two weeks ago, may no longer be sufficient.
While Ukraine waits for the IMF loan, central bank Governor Valeriya Gontareva is tightening the amount of foreign currencies available to importers and banning banks from lending money for clients to buy currencies other than the hryvnia. More restrictions may follow as the country’s economy contracts amid a deadly conflict with pro-Russian rebels in the country’s east, Gontareva said Monday.
With its foreign reserves dropping 61 percent to $6.4 billion in the four months through January, the “cupboard is basically bare,” said Timothy Ash, Standard Bank Group Plc’s London-based chief economist for emerging markets. The hryvnia has fallen 71 percent against the dollar over the past year.
Despite the IMF pledge, Ukraine hasn’t received a major injection of cash since a $1.4 billion IMF disbursement on Sept. 3, the lender’s website shows. Lawmakers in Kiev have yet to pass amendments to the budget needed to allow the new IMF program to begin. Disbursements could start a few weeks after the fund’s board approves the facility, which may take place this week or next, according to Ukraine’s Finance Minister Natalie Jaresko.
Ukraine’s $2.6 billion of 9.25 percent bonds due in July 2017, the sovereign’s benchmark security for foreign investors, fell 0.07 cent to a record 41.47 cents on the dollar by 11:30 a.m. in Kiev, taking its eight-day decline to 15 cents. The hryvnia weakened to an all-time low 32 per dollar, according to data compiled by Bloomberg.
“The way things are going, the central bank may need to declare a moratorium on money leaving the country, perhaps through an interruption in debt servicing as Argentina did,” Richard Segal, head of emerging-markets credit strategy at Jefferies International Ltd. in London, said by phone Monday.
The IMF-led aid package, announced on Feb. 12, totals $40 billion when including bilateral deals with nations as well as about $15 billion in savings expected from negotiations the country is pursuing with bond investors.
The Washington-based lender has stalled payouts under a previous funding plan as the nation held presidential elections in October and lawmakers delayed the passage of this year’s budget while the sides negotiated the second bailout.
“The implementation of strong policies and reforms under the new IMF program, including a flexible exchange rate, will help the economy adjust and lay the basis for a return of growth and confidence,” an IMF spokesman said by e-mail on Monday. “However, in the short term, tightening of the administrative measures on a temporary basis may be necessary to support the foreign exchange market.”
Ukraine’s debt is poised to extend declines as investors are underestimating losses in the country’s planned debt reorganization, analysts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said on Friday in separate reports.
“Ukraine is bankrupt and the only reason the bonds are trading at 40-45 is because of IMF involvement,” Dmitri Barinov, a money manager who oversees $2.6 billion of emerging-market bonds at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail on Monday. “Ukraine has neither the possibility nor the willingness to pay its debt, but will be forced to restructure under IMF conditions.”
The hryvnia’s 51 percent depreciation against the dollar this year, following a 48 percent drop in 2014, is driving up the prices of imports and energy, while making external debt payments more difficult for Ukraine. Gontereva yielded control of the currency earlier this month, allowing it to weaken in an IMF-backed move which helped eliminate an unofficial street market for currency transactions.
“The National Bank of Ukraine has few options, with the West still dragging its feet over financial support,” Ash, the chief emerging-markets economist at Standard Bank in London, said by e-mail. “History will judge Western leaders very poorly for how they have managed” to help Ukraine, he said.