Page 4 - UKRRptOct20
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1.0 Executive summary
Ukraine is in trouble. The Zelenskiy administration has increasingly abandoned its early reform agenda and he has bee focusing more on consolidating power by emphasizing the loyalty of appointees over their effectiveness.
Things came to a head with Ukrainian president Volodymyr Zelenskiy decision to sack the widely respected governor of the National Bank of Ukraine (NBU) Yakiv Smolii which has unsettled the International Monetary Fund (IMF). The government’s commitment to the principle of the independence of the NBU is now in question and badly needed next tranche from the IMF of about $700mn is now in question. That could lead to a credit crisis later in the year as the government will struggle to meet its debt obligations.
The souring investment story has also hit the Ministry of Finance hryvnia-denominated OVDP treasury bills (OVDP) market, which has become a major source of funds for the government. The market attracted some $5bn in its first year of operation, but since the EM sell off began at the end of February investors have been reducing their position. The share of non-residents in the OVDP bonds has fallen from a peak of 35% set in the first two months of this year to 29% as of August, although the absolute amount of bills in terms of dollar value has risen over that time. The falling appeal of the OVDP will only add to the government’s funding problems.
The fiasco over the unilateral increase of so-called green tariffs that saw the deal for renewable generators significantly worsen remains a mess. The state owes these power companies some $1bn in unpaid tariffs and doesn't have the money. There is talk of issuing a bond to cover the debt, but with the investment climate cooling that doesn't look likely.
The renewables sector has been on the one big success of the last four years and attacked about $5bn in FDI into the sector with hundreds of projects of which the local oligarchs (especially D TEK) accounted for a few big ones, but only 17% of the total. However, the government’s handling of the affair was so poor it has done significant damage to Ukraine’ investment image. Nevertheless, foreign investors in the sector are still investing and the new source of non-fossil fuel power is a net plus for the country.
Ukraine aggregate state debt stays flat in August after the government redeemed a $1.6bn Eurobond. Ukraine’s state and state-guaranteed debt amounted to $85.1bn as of August 31 and remains at a manageable level for the meantime. The government has even found some money to start buying back its GDP warrants while they are cheap which potentially would become very expensive to service should the economy start growing strongly.
The new federal budget is another sore point between the government and the IMF.
The Ukrainian cabinet has drafted the 2021 budget with 6% of GDP deficit. However, the IMF says it is too much and wants the government to reduce the deficit to 5.7% “some how.” Just how this will be achieved was not clear at the
4 UKRAINE Country Report October 2020 www.intellinews.com
