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in May 2015. It took a year to get inflation under control again, but even then it remained in the teens for the next four years. It was only in 2019 with real interest rates of 10% that the NBU finally defeated inflation, which has been falling rapidly in the first quarter of this year. Going into the coronavirus crisis inflation was nly 2.4% -- a post-Soviet low.
If the currency slides further then that will feed through to pushing up prices again over the next six months. The NBU has been aggressively cutting rates at its last few meetings, and cut again by a full percentage point in February. And the government has managed to pay down debt to bring the debt to GDP ratio to a comfortable 60%.
“But many issues remain,” says Elina Ribakova, deputy chief economist for the Institute of International Finance (IIF). Ukraien has failed to close a $5.5bn Extended Fund Facility (EFF) with the International Monetary Fund (IMF) despite the fact the the principle terms of the deal were agreed in December. And investors were unnerved after Ukrainian president Volodymyr Zelenskiy shook up the government with a major reshuffle on March 3. That included the sacking of the technocratic Ukrainian Prime Minister Oleksiy Honcharuk as well as the well respected Ministers for Finance and Economy. Finally the role that oligarch Ihor Kolomoisky, who financed Zelenskiy election campaign, have not been resolved.
Ribakova and the IIF released its worst case scenario for Ukraine in the crisis with estimates of where the country might be by December, which makes for grim reading. It includes zero disbursements from the IMF this year, zero Eurobond issues, zero financial help from the EU, outflows from the local bond markets, and a decrease of $7.1bn of the hard currency reserves – enough to spark another deep devaluation of the hryvnia.
“There is a high change that with the combination of coronavirus and no IMF deal this will turn into the baseline scenario for Ukraine,” Ribakova tweeted on March 21.
Closing the deal with the IMF was important before, but now it is crucial. The crisis has already seen the yields on Ukraine’s 2028 Eurobonds soar by 150bp to over 11% that effectively shuts the sovereign out of the market. At the same time a collapse of the talks with the IMF would not only keep Ukraine’s borrowing costs on the international capital markets high, it also cuts off Ukraine’s access to its other donors, who’s loans are all contingent on first getting an IMF deal in place.
“Without the IMF program there won’t be market access for Ukraine,” says Ribakova. That’s important as Ukraine has a heavy debt repayment schedule this year and not enough in reserves to pay all of it on its own. As the IIF chart of the positive and negative scenarios shows, closing the IMF deal makes all the difference to the money Ukraine can raise. "Upcoming debt repayments remain significant. The NBU has reserves, but outflows tend to accelerate as reserves fall,” adds Ribakova.
11​ UKRAINE Country Report​ April 2018 ​ ​www.intellinews.com