Page 50 - bne IntelliNews Country Report: Ukraine Dec17

Ukraine returned to international debt markets for the first time since 2013 placing USD3 billion Eurobonds (net USD1.3 billion financing after repurchasing USD1.7 billion securities, 44% participation rate, coming due in 2019-2020). The breathing space provided by the 2015 restructuring ends in September 2019, as Ukraine faces USD1.6 billion in external amortisations. External bond amortisations average USD2.3 billion in 2020 and 2021. In additional to market sentiment, Fitch believes that continued engagement with the IMF and multilateral partners is fundamental to maintain access to external markets.
As with previous reviews, the completion of the fourth review under the IMF EFF has been delayed. Although pension reform (a key condition) was approved and signed into law in early October, the heavily amended version has yet to be signed-off by multilateral partners. In addition, the government needs to put in place legislation on privatisation and the fight against corruption. Fitch expects the next programme tranche (possibly USD1.9 billion) next year after the approval of the 2018 budget and an agreement between the IMF and the government regarding changes to the formula to adjust household heating tariffs. Further disbursements from the IMF and other international partners will depend on progress in the structural reform agenda, most notably land reform and delivering results in terms of privatisation and the fight against corruption, which is subject to delays and execution risks as the 2019 electoral season picks up pace.
Gross external financing needs (current account balance plus public and private sector maturities) have eased but will average a high 70% of international reserves in 2018-2019. Fitch expects the current account deficit to increase to 4.1% of GDP in 2017 and average 4% in 2018-2019. In the short term, material net external borrowing by the private sector and a strong pick-up in FDI are unlikely, meaning borrowing by the public sector will provide the bulk of external financing.
Inflation will average 12.9% and finish 2017 above the National Bank of Ukraine's (NBU) target band of 8%-2% due to supply shocks (food prices). However, it is likely to decline gradually over the forecast period and average 7.8% in 2019, still above the 5% 'B' median. Ukraine's strengthened policy framework is underpinned by increased exchange rate flexibility, the NBU's commitment to sustainably lowering inflation, and moderate fiscal imbalances. The delay in the appointment of a new NBU governor has not led to policy uncertainty due to improved institutional capacity, recovering domestic confidence and favourable external environment.
Growth will likely remain weaker than 'B' rated peers, despite a forecast recovery. Fitch forecast growth at 2% for 2017 and expects Ukraine to accelerate to 3.2% and 3.7% in 2018 and 2019, respectively, driven by domestic demand. Private consumption benefits from improvement in real incomes and increased access to credit. Investment (21.4% of GDP) is experiencing a cyclical recovery, but it will remain below 'B' peers (24%).
Ukraine will record a lower general government deficit (2.7% of GDP) than peers (4.7%) in 2017. Expenditure pressures from wages and benefits, and potential fiscal loosening before elections create risks for the government's deficit target of 2.2% in 2019. Fitch expects deficits to average 2.8% of GDP in 2018-2019. On the back of primary surpluses, reduced financial sector outlays and moderate FX depreciation, Fitch forecasts general government debt to
50 UKRAINE Country Report December 2017 www.intellinews.com