Page 22 - bne_newspaper_November_09_2018

Opinion
November 9, 2018 www.intellinews.com I Page 22
Ukraine and the IMF euphoria: sustainable risk shifting to the international capital market?
By fixed income and FX research at Raiffeisen Bank International (RBI) in Vienna
Everything seems to be good in Ukraine in the short term. In contrast to the more cautious forecasts at the beginning of the year, Ukraine's economy is growing much faster than expected and should record GDP growth of at least 3.5% in 2018.
With its International Monetary Fund (IMF) extended fund facility effectively frozen, thanks to the government’s foot-dragging on reforms, the country has been desperately short of cash and that has undermined the strength of the hryvnia. But as the year comes to a close it looks like a sharp currency devaluation has been avoided
in 2018 - a very difficult year for some other emerging markets - although Ukraine is one of the most fragile emerging markets in the world according to some key credit risk metrics.
And the National Bank of Ukraine (NBU) has established itself as one of the most credible economic policy players in the post-Maidan government, having stuck to its guns with a restrictive monetary policy geared to guarding against surging inflation and managing risk.
So far, so good. Now, after extremely tough negotiations, a new 14-month agreement with the IMF is within reach. This will allow Ukraine to enter the 2019 election year without facing the threat of a payment bottleneck or a potential financial and economic crisis.
Ukraine looks good for now but 2019 is going to be tougher
But this is also where the problems lies. With a new IMF deal almost in the bag (the IMF board needs to approve the deal and wont until after the government passes the 2019 budget law, expected to happen in December) Ukraine has already tapped the international capital market with a $2bn Eurobond issues and has the possibility of hitting the market again without any material restrictions.
The government, it seems, has been waiting for this. Almost as soon as the IMF signalled that deal is back on the state tapped the international market. Now other Ukrainian issuers, such as state-owned gas monopolist Naftogaz, have expressed an interest in following the ministry of finance into the debt capital markets.
At first glance, this indicates a certain degree of international investor confidence. However, the international investor community should not be unworried. On the one hand, Ukraine sovereign risk - after a considerable recovery rally in 2017 into the spring of 2018 - is currently still priced at the lower end of reasonable market ranges; on the other hand, a considerable shift in risk is currently underway.
At the current market valuations Ukraine is trading close to its historical lows in relation
to other emerging market benchmarks – e.g. other global Emerging Markets with B ratings or countries such as Pakistan, Egypt and Nigeria.