IMF to decide on Ukraine loan in last week of April

Макроэкономика 10.04.2014 The IMF executive board will decide on the conditions of its loan program with Ukraine during the last week of April (which starts April 28), Ukraine’s Finance Minister Oleksandr Shlapak informed journalists on April 9, according to the Interfax-Ukrayina news agency. He added that Ukraine’s delegation will arrive for IMF negotiations on April 10 “to raise the question of how to quicken this process.” Meanwhile, the Ukrainian currency hit a new historical low against the U.S. dollar, closing at UAH 12.3/USD yesterday The hryvnia has fallen 33% YTD. Alexander Paraschiy: The delay in IMF negotiations has created extra pressure on the ForEx market. The IMF mission to Ukraine’s provisional positive statement at the end of March and the subsequent approval of a revised 2014 Ukrainian budget were positive signals. The market expected the first wire would arrive in the following few weeks, yet that didn’t happen. Without any word from the IMF on the status of the loan, market players haven’t had any idea of where hryvnia might land and have even started panicking. The NBU’s strange policy of laissez-faire at the ForEx on the one hand, and extensive refunding of the banking sector on the other, also adds pressure to the market. A visit to Washington by the Ukrainian delegation on April 10 might bring some clarity to the situation, but the Fund seems to be waiting for something to get done on the Ukrainian side to finalize the loan. Most likely, the procurement law is the bottleneck since the IMF agreement opens abundant external budget funding for Ukraine. It’s no surprise to see IMF officials utterly cautious in light of two failed programs in Ukraine during the last five years. Yet we do not see any room for maneuvering for the authorities in light of the dire straits Ukraine is facing now. Thus accepting all the pre-conditions and signing a new memorandum is just a matter of time. Meanwhile, Ukraine will keep facing a foreign currency deficit until the market gets a signal from the IMF. We do not rule out the hryvnia sinking even deeper. Since we have already reached the middle of April, early May now looks like the most realistic time for the IMF funding to arrive. As soon as the agreement is signed, we anticipate pressure at the ForEx easing promptly, especially in light of the fast-shrinking trade deficit. Already in February, the C/A deficit plunged 12x to USD 121 mln vs. USD 1.47 bln a year ago. The fiercer hryvnia decline in recent weeks has only strengthened the tendency. Against this backdrop, we remain optimistic about IMF cooperation and hryvnia strengthening after the tension eases. But for April, due to the delayed IMF talks, a very high risk remains that NBU reserves will fall by at least 5% m/m (to USD 14.3 bln) on the back of USD 0.7 bln in external redemptions during the month.