Ukraine expects IMF to agree up to $11bn cash disbursal

By bne IntelliNews March 11, 2015

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The International Monetary Fund is ready to disburse to Ukraine the first tranche of an agreed extended funding facility (EFF), confirming on its website that the sole subject of discussion at an IMF board meeting on March 11 will be the loan.

At the same time, Ukrainian President Petro Poroshenko announced he had signed into law a packet of amendments to Ukraine's 2015 budget that "constitute one of the pre-conditions for granting Ukraine an extended IMF loan."

Poroshenko reminded the nation what was at stake with the IMF loan in a TV interview earlier on March 10. "Ukraine is living in war-time conditions, in the conditions of territory being occupied," he said. "Around 25% of the country's industrial potential has stopped, around 10% has been physically destroyed."

The National Bank of Ukraine was also making sure the March 11 meeting turns out well, using administrative means to strengthen Ukraine's hryvnia to UAH21.7 to the dollar, the exchange rate on which Ukraine's 2015 budget is based. 

The strengthening of the hryvnia marks a 57% surge since the troubled currency hit a historical low of UAH33.75 against the dollar on February 26. On the cash market, the dollar was bought for around UAH23.43 and sold for UAH27.56, according to data compiled at 

Governor of the National Bank of Ukraine Valeriya Gontareva said March 10 that she was "confident in the further stabilisation of the situation on Ukraine's forex market after Ukraine's receipt of an IMF tranche under the EFF programme to be confirmed tomorrow March 11."

The central bank has achieved the exchange rate surge by hiking interest rates to 30% and introducing sweeping capital controls on February 24: it closed down the forex market by administrative means, leaving the NBU the main buyer of hard currency from exporters required to sell 75% of their revenues. The government has also imposed a 5% import tax to help balance the current account, and on March 5 banned any payments of dividends to international investors.

Finance Minister Natalie Jaresko tweeted on March 9 that the controls were justified "to curb currency speculation and fraud in import and export contracts," while also gaining "breathing room for Ukraine pending IMF package".

With the approval of the IMF board seen as certain, the key parameter is how much Ukraine will get in the first tranche.

Expectations are high. Previously, Jaresko said that disbursals in the first year of the EFF could be as much as 60% of the total volume, or $11bn – with half to go to the NBU to replenish reserves, and half to go to the goverment for foreign debt payment. First Deputy Prime Minister Ihor Umansky previously put the figure at $10bn in the first-year disbursal.

Jaresko tweeted on March 9 that the IMF said the EFF disbursement would "be heavily front-loaded to achieve rapid macroeconomic stabilization," and on March 10 again tweeted again about the "pending $17.5bn front-loaded IMF loan".

Ukraine has to make an estimated $5.4bn of foreign debt repayments in 2015, according to Fitch Ratings, with central bank reserves down to only $5.6bn on March 1.

Disbursal of the IMF funds will also unlock additional funds of around $9.2bn committed by the World Bank, European Investment Bank, the US and EU, which were made conditional on IMF approval of Ukraine's parameters. IMF head Christine Lagarde said on February 12 that total Western support for Ukraine could total around $40bn over the four-year term of the EFF, although it is unclear how she reached that figure.

What happens next?

One of the first consequences of Ukraine receiving the IMF cash will be for the government to effectively default as part of a debt restructuring deal with bondholders. Jaresko said in February that the IMF wants Ukraine to reach a restructuring deal before the IMF starts its first scheduled loan review in June.

Ukraine has $16bn-18bn of international bonds outstanding, according to Bloomberg data. The benchmark 2017 bonds are trading at under 50 cents on the dollar, after a rally on March 9-10 saw the price of the $2.6bn worth of 2017 bonds increase 1.91 cents to 46.98, up from a low of 41.35 in late February.

Bondholders of Ukraine debt could avoid a haircut, but even reprofiling of the debt – changing the period of repayment – would count as restricted default on completion of the deal. “We don’t expect haircuts at this stage,” Fitch director Paul Rawkins told Bloomberg on March 10.

Ukraine has already contracted the investment banking group Rothschild to start talks with bondholders. Rothschild's Giovannie Salvetti told Bloomberg earlier that a bondholders' committee would likely be formed, but that creditors were divided into those wanting to wait for a Ukraine proposal, and those wanting to take the initiative in warning Ukraine what conditions they would consider unacceptable.

The restructuring talks may be made more complicated by the composition of the bondholders. US mutual fund firm Franklin Templeton is the largest holder of Ukraine's sovereign debt, with up to 30% of the total, making them a key player in the restructuring talks.

In addition, Russia owns all of a two-year $3bn Eurobond issued as part of a controversial bailout in December 2013 by now ousted president Viktor Yanukovych.

Russian officials have stated they would not agree to any restructuring. But the Kremlin has indicated that it would not seek early repayment of the Eurobonds, the covenant of which stipulates that total Ukrainian debt should not exceed 60% of GDP. Central bank head Gontareva has acknowledged that Ukraine has already passed this threshhold.

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