Ukraine Fails to Seal Bailout After 2nd IMF Visit of 2013Daryna Krasnolutska and Kateryna Choursina
Ukraine failed to agree on a bailout from the International Monetary Fund after the lender’s representatives visited the recession-hit former Soviet republic for the second time this year.
The fund and the government will to continue discussing Ukraine’s request for about $15 billion in aid, its third rescue in four years, according to an e-mailed statement today.
“The mission made good progress in discussing these issues, and our dialog will continue in the coming weeks,” Christopher Jarvis, the Washington-based mission chief, said in the statement. “The key building blocks of a new program would be measures to reduce Ukraine’s fiscal and external current-account deficits, and energy sector and banking reforms, in order to create the conditions for sustained economic growth and job creation in Ukraine.”
Ukraine’s economy fell into recession in July as global prices for exports such as steel plunged. The eastern European nation’s junk credit rating was downgraded in December by Standard & Poor’s and Moody’s Investors Service, which cited foreign financing requirements. The government has said it can survive without the IMF as it’s retained access to foreign debt markets, selling Eurobonds in February and yesterday.
Ukraine’s hryvnia, which has lost 1.1 percent against the dollar this year, slid to 8.1375 as of 13:27 p.m. in the capital, Kiev, from 8.1370 yesterday, data compiled by Bloomberg show. The yield on government bonds due 2022 rose to 7.286 percent, the highest level since April 3. The cost to insure state debt against non-payment for five years using credit-default swaps rose 1 basis point to 563.
The lack of an agreement with the IMF is “a bit disappointing,” according to Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev.
“Favorable external market conditions may continue and Ukraine may borrow more and delay further resolving its nearly enshrined problems of gapping budget and current-account deficits,” he said by phone. “But such a position is very fragile as we may see other developments should the key central banks alter their monetary policies.”
Ukraine sold $1 billion of Eurobonds with a 7.625 percent coupon in February and an additional $1.25 billion yesterday with a coupon of 7.5 percent.
As a condition of aid, the IMF wants Ukraine to trim heating subsidies to narrow its budget deficit. President Viktor Yanukovych, who faces re-election in 2015, refuses, saying people can’t afford to pay higher prices. The lender is also urging Ukraine to make the exchange rate more flexible.
Reaching a deal with the IMF would trigger an additional 610 million euros ($805 million) of aid from the European Union, which postponed an Association Agreement and free-trade pact after former Prime Minister Yulia Tymoshenko and her Interior Minister Yuriy Lutsenko were jailed in cases the 27-member bloc deems politically motivated.
Yanukovych pardoned Lutsenko April 7, a move EU Enlargement Commissioner Stefan Fule called a “first but important step” in dealing with selective justice.
Ukraine’s economy contracted 0.8 percent from the previous three months in the fourth quarter after a 1.5 percent decline in the July-September period, confirming the country’s second recession in four years. Industrial production slumped 4.8 percent from a year earlier in the first two months as metals and chemical-product demand sank.
S&P cut Ukraine’s rating one level to B, five steps below investment grade in December, while Moody’s lowered it to B3, six levels below investment status.
Central bank reserves fell to $24.7 at the end of March from $38.2 billion in August 2011 as the central bank spent foreign currency to keep the hryvnia stable. The current-account gap widened to a record 8.4 percent of gross domestic product last year.
“Worsening external trade conditions and tight pressure on debt repayments this year will force the central bank to spend reserves, which are already at low levels,” said Vladislav Sochinsky, a treasury executive at the Kiev-based unit of Citigroup Inc.