Even with IMF Aid, Risks Loom Large for Ukraine

Even with IMF Aid, Risks Loom Large for Ukraine

Finance Minister Jaresko sees debt restructuring and economic reforms as steps toward ‘return to growth in 2016’

In April, ratings agency Standard & Poor’s placed a negative outlook on Ukraine, citing a “deteriorating macroeconomic environment” and warning of a likely default on foreign-currency central government debt. The assessment was a tangible indicator of the risks facing the economy and the challenges confronting Natalie Jaresko, the country’s American-born and -educated finance minister, who has been in that post since December 2014.

On a recent trip to the U.S., Jaresko spoke about efforts to weed out corruption, stabilize local markets and gain energy independence. “Delivering on the Ukrainian government’s reform program and the objectives agreed with the International Monetary Fund will be critical to restore confidence and growth, bring inflation to single digits, keep external deficits manageable and replenish international reserves,” Jaresko said.

The finance minister was speaking a few months before a September 6 statement in Kiev by IMF managing director Christine Lagarde: “I am extremely encouraged by the progress that has been achieved in the past few months. In a difficult environment, macroeconomic stabilization is taking hold and the economy shows signs of turning the corner. This achievement is a tribute to the courageous work of the Ukrainian authorities.”

Lagarde added, “Significant challenges remain. It is essential to stay the course of reform and, indeed, deepen the effort. As Ukraine moves forward, it has the full support of the IMF.”

Ukraine’s agreement with the IMF involves a $17.5 billion four-year Extended Fund Facility, with an initial $5 billion of funding designed to help to jump-start the economy as a first step toward longer-term stabilization.

“We will still need to carry out the necessary debt restructuring and reforms to grow the economy,” Jaresko noted. “With the help of the funding from the IMF, our government reforms and debt restructuring, we can begin to create the right business environment and economic stability to attract the private sector and foreign investors to Ukraine.”

Jaresko said that Ukraine was spending some $5 million a day to defend its borders, exacerbating its economic crisis. “Our government’s structural reforms as agreed with the IMF will help to stabilize and grow the economy. We have started to carry out our government agenda and will continue to do all we can to ensure Ukraine is restored. Failure is not an option.”

Jaresko, described in a Bloomberg headline as “The American Woman Who Stands Between Putin and Ukraine,” discussed in the following interview Ukraine’s debt restructuring, the costs of conflict, rebuilding trust among investors, and reasons for long-term optimism despite the recent downgrades and the risks they reflect.

How confident are you about a debt restructuring plan?

I am confident that we can reach a debt restructuring agreement. This is today’s most pressing financial challenge. We are fighting a war in eastern Ukraine to protect not only our sovereignty and territorial integrity, but also the security of the whole of Europe. Ukraine is bearing a terrible cost. The war has triggered a very serious crisis economic crisis, which was worsened by Ukraine’s poor previous economic governance. Seventy four years of communism and 23 years of uncompleted reforms,mismanagement and large-scale political corruption by the previous regime left the country in a miserable economic situation.

How big is the funding gap, given that the IMF estimates Ukraine’s needs over the 2015-2018 period to be approximately $40 billion?

Out of this $40 billion, $17.5 billion will come from the IMF and $7.5 billion from bilateral and multinational partners. This leaves a gap of more than $15 billion that needs to be plugged through debt restructuring. I have been in the United States and London to engage in consultations with holders of Ukraine’s public debt to discuss our plans to restructure our finances as necessary. It is in the interest of everyone and our international bondholders that we address this pressing financial challenge so we can move forward over the next four years and ensure the long-term sustainability of the Ukrainian debt. There is no alternative, but our return to the capital markets will be more assured by a debt restructuring.

What should investors know about Ukraine and the openness of its markets?

dkFirst, it has tremendous economic potential. The goal of the IMF package and the government’s reforms is to put Ukraine on the path to economic recovery and growth. There is a lot of low-hanging fruit to create the right conditions for businesses and investors. Also, since the revolution of dignity in spring 2014, a lot has already been achieved. Ukraine organized free and fair, democratic presidential and parliamentary elections, resulting in a pro-European reformist majority.

Our reform agenda aims not only to cope with macroeconomic deterioration, but also to drive major structural changes and end the old ways of doing business. This means tackling corruption at all levels, increasing the transparency and efficiency of state owned enterprises, bringing commercial activity out of the shadow economy, implementing fiscal reform to broaden the tax base, and creating the right conditions for businesses and investors.

Is energy an area of focus?

Energy sector reform is one area for attracting investors. We are restructuring the state oil and gas company, Naftogaz, to create a transparent, efficient market and enable foreign investment. In addition, we are reviewing our oil and gas

royalty approach to make it both fiscally sound and investor-friendly. I know that the current system has raised many concerns among international investors, and we are committed to improving it. Our goal is to introduce a new, competitive royalty approach to enable and encourage investment in this sector while supporting Ukraine’s goal of becoming ever more energy independent.

What do you see as the biggest challenges for Ukraine now, and how to overcome them?

Without a doubt, the conflict in the eastern part of Ukraine has had a significant impact on the economy. As a result of the war, Ukraine has lost 20% of its economy, and its industrial sector output has fallen by nearly 11%. We also have to think about the infrastructure damage and loss of economic output from the regions under the occupation of Russian and Russian-backed terrorists. More than 10,000 apartment buildings were destroyed in the Donetsk region, along with numerous industrial plants, airports, roads and energy infrastructure.

What sectors are you optimistic about?

We could see a pick-up this year in agriculture and agribusiness. Ukraine is blessed with vast amounts of fertile black earth and is a major producer of agricultural products – it is the fourth largest grain exporter and the largest producer of sunflower oil – and this sector could see significant gains. In March, the government passed a law to simplify the leasing of agricultural land plots as part of an effort to promote a more efficient and productive industry.

What will be the impact of ratings downgrades on selling Ukraine to foreign investors?

We have to take the necessary actions to stabilize and quickly grow our economy. This will be carried out one stage at a time, as we have to build the right foundations. Our goal is first to stabilize our macroeconomic situation, and then to create the conditions for a return to growth in 2016.

How would you characterize the future ratings outlook?

Our goal is to ensure we achieve medium-term sustainability of public finances so that we can return to the credit markets. Once the debt restructuring is complete, rating agencies will consider Ukraine’s new liquidity and solvency conditions and the significant steps we are taking to stabilize the financial and banking system and grow the economy. This is the objective of the four-year IMF program and the reforms being implemented by the Ukrainian government.