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help and brought in useful export revenues.
However, the Institute of International Finance (IIF) concludes that unless a new International Monetary Fund (IMF) deal is done then the country could face a balance of payments crisis in the next year, although there is a good chance the government can cut a deal and avoid the worst case scenario.
“We conclude that near-term balance of payments risks are moderate—even if negotiations with the International Monetary Fund (IMF) over additional disbursements under the 2020 Stand-by Arrangement (SBA) are unsuccessful,” IIF economists Benjamin Hilgenstock and Elina Ribakova, concluded in a paper after virtual roadtrip to the country.
One of the biggest changes to Ukraine’s outlook has been the IMF promise to distribute an extra $2.7bn of no-strings attached aid money as part of a $650bn redistribution programme to help developing markets around the world come out of the coronacrisis faster. That money takes significant pressure off Ukraine’s funding needs for now.
“Beyond a 6-9 months horizon, however, the outlook is significantly more uncertain and a breakdown of Ukraine’s relationship with the IMF and other international partners would have considerable implications for non-resident capital flows,” the IIF authors said. “A closer look at different scenarios shows that the country could face an external financing gap of $4.5 bn in 2022 under pessimistic assumptions.”
The pessimistic scenario boils down to no IMF deal and the knock on repercussions. Currently there is still two tranches from the original $5bn programme of $700mn and $2.2bn outstanding that have been suspended due to backtracking by the Zelenskiy administration on reforms.
However, there is another $750mn of EU money under the fifth macro-financial assistance program that is tied to the IMF deal. If there is IMF deal there will be no EU money either. And finally the absence of an IMF deal, which implies a payment crisis, will further undermine bond investors confidence who will leave the domestic market.
Ukraine was hooked up to the international settlements and payment system Clearstream in 2019 in a hugely successful reform that saw some $5bn of inflows and has become a major source of funding for the government. If these inflows reverse, as they did last year, then that will greatly increase the pressure on the government. Moreover, Ukrainian banks have been stepping into the breach and also buying the local bonds, but IIF has argued for a while that the local banks are almost already tapped out and do not have the resources to cover all of the government’s funding needs.
The final element in the pessimistic scenario is that the lack of an IMF programme will also undermine investor confidence and stymie badly needed foreign direct investment (FDI).
The government has a very ambitious plan to increase foreign investment from $420mn last year, to $3bn this year, and to $15bn by 2025, according to the National Economic Strategy 2030. Other goals for 2030 are: double the economy; triple exports to $150bn; nearly triple labour productivity; cut in half the state share in the banking system; cut the debt-to-GDP ratio to 30-40%;
8 UKRAINE Country Report July 2021 www.intellinews.com