IMF Approves 2-Year USD 17 bln Stand-By Arrangement for Ukraine

Макроэкономика 02.05.2014 The IMF Executive Board has approved a two year USD 17.01 bln stand-by arrangement for Ukraine with USD 3.19 bln for immediate disbursement, the Fund reported on April 30 though its website. About USD 2 bln from the first wire will be allocated to budget support. The next two wires will be subject to bi-monthly performance reviews. The main elements of Ukrainian economy treatment will include the adoption of inflation targeting by mid-2015 while maintaining a flexible exchange rate regime. Fiscal consolidation with a reduction the budget deficit to about 3 % of GDP by 2016 are among the key priorities. Keeping the minimum wage and public wage growth in line with productivity will be the main focus of fiscal consolidation efforts. Eliminating the large quasi-fiscal losses of Naftogaz by 2018 and strengthening the company’s transparency and governance will be crucial for the IMF program’s success. The outlined schedule of gas and heating tariff increases over the next four years should bring Naftogaz’s deficit to zero. Remarkably, all the tough fiscal consolidation efforts should be followed with sound programs of protecting the vulnerable groups in society. The IMF anticipated a 5% GDP decline in Ukraine and a 16% inflation speed up in 2014. The current account deficit is projected to shrink to 4.5% of GDP which is in line with our estimates. Gross reserves are expected to increase to 2.5 months of imports. Public debt is expected to hike to 57% of GDP in 2014 on the back of hryvnia devaluation. If the program is successful the Fund anticipates recovery as early as 2015 with a 2% GDP growth and a further average GDP increase of 4-4.5% p.a. in the medium term. Alexander Paraschiy: Probably, there is no need to say how crucial this decision is for Ukraine under current circumstances. It is not only the matter of solvency through the year but also the point of investments and other financial aid Ukraine badly needs to start rebuilding its economy. The program opens USD 27 bln funding which is expected to be the ground for investment demand in the context of current risks. As we discussed previously, we do not see any other way for Ukrainian authorities but to stick thoroughly to all commitments of the IMF program. Against this backdrop, we are quite optimistic about this program to become a success story. In fact, we are already observing a positive trend on external accounts (non-Russian exports have already started reviving) and the real economy is contracting much less than anyone anticipated (only 1.1% GDP decline in 1Q14). All in all, if the trend we are observing preserves, and we are lucky to avoid a large-scale military conflict, we see some grounds for the economy to switch in positive numbers by the end of the year.