Ukraine Is Back

For the first time in five years, Ukraine sold its bonds on the international market. On September 18, the Ukrainian government sold $3 billion of fifteen-year Eurobonds with a 7.375 percent annual yield. The bond issue was oversubscribed by more than three times. Initial statements mentioned a planned sale of $2.5 billion, so the Ukrainian government increased the volume because of great demand. This sale has many implications.

The most obvious observation is that Ukraine is back. This sale was a success and signifies great approval of Ukraine’s economic policies as they have been pursued after the 2014 Revolution of Dignity. Ukraine’s new democratic government has managed to minimize its budget and foreign payments deficits, keeping the public debt under control. The most astounding number is that Ukraine’s public expenditures have fallen from 53 percent of GDP in 2014 to 40 percent today.

Ukraine has done well, but this is also a good time to sell bonds. Global markets are looking for high yields, and the risk appetite is high. Many countries have entered international bond markets, and Ukraine is wise to follow suit. It is making its mark by getting lower costs for its bonds than expected.

A specific reason for Ukraine to go back to the international debt markets was that it expected high debt service in 2019 and 2020, of $7.5 billion and $6.1 billion, respectively. This bond issue will primarily be used to refinance these debts and reduce the debt service for those two years by $1.16 billion and $415 million, respectively. The debt service in 2019 no longer seems particularly worrisome.

Nothing succeeds like success. The bond sale will make it easy for Ukraine to sell more bonds soon and even out its debt service further. It could happen later this year. More bond sales could be used to improve the debt service timing of Ukraine more, or to mop up too highly priced debt obligations.

Traditionally, Ukraine used to get 3-4 percent of GDP each year in foreign direct investment, but during the last three years Ukraine has hardly received any. The main reason has been that foreign investors have been afraid of Russia’s military aggression in Ukraine. Sales of government bonds are usually seen as much more secure than direct investments, but the recent success with government bonds may draw attention to Ukraine as an attractive place for direct investment as well.

The danger, however, is that Ukraine abandons its IMF agreement and its current reform path. The Ukrainian government remains divided between forces that favor reform and those that prefer the old vested interests. So far, substantial financing from the IMF has managed to keep the reformers on top, but Ukraine’s entry into the international bond markets eases the IMF pressure. In 2010, President Viktor Yanukovych did whatever the IMF demanded for a few months until he achieved access to the international bond markets. Then he stopped all reforms and focused on his own enrichment instead.

Ukraine has complied with severe IMF demands on the unification of energy prices, reduction of public expenditures and budget deficit, and the adoption of a floating exchange rate. Corrupt banks have been closed.

But the next round of reforms might be more challenging for Ukraine’s ruling political elite. At the top of the list comes the establishment of an independent anticorruption court, which President Petro Poroshenko spoke out against on September 15 at the Yalta European Strategy conference in Kyiv. For the IMF, this appears to be an absolute condition for further disbursement to judge from IMF First Deputy Managing Director David Lipton’s recent interview.

Other Western demands are private sales of agricultural land, a limited pension reform, and new legislation on privatization. Pension reform is under way, and on September 15 the parliament submitted a budget for 2018 with a deficit of only 2.4 percent of GDP, while the establishment of a land market seems to be indefinitely postponed.

In March 2015, the IMF and Ukraine concluded a $17.5 billion financing agreement to be distributed over four years. To date, the IMF has disbursed $8.8 billion—or half of the foreseen funding. The Ukrainian government had expected a delayed tranche of $1.9 billion before the end of this year, but after Lipton’s skeptical words and a delay of the next IMF mission, this remains in doubt.

Ukraine’s economy is set to grow fast driven by exports that are up by one quarter, construction by almost as much, and retail sales by 8 percent in the first half of 2017. The question is whether the returning growth will encourage or impede the government to pursue further reforms.

Anders Åslund is a senior fellow at the Atlantic Council and author of the book “Ukraine: What Went Wrong and How to Fix It.”

 

Source: Atlantic Council

Ukraine Will Pursue Hard Reforms This Fall, Finance Minister Says

After a week of back-to-back meetings in Washington, Oleksandr Danylyuk is tired. He gladly downs a cup of coffee before we turn on our microphones to discuss Ukraine’s economy. The affable forty-two-year old finance minister is one of the few reformers left in Ukraine’s Cabinet of Ministers and has a reputation as a doer. He’s in town for the International Monetary Fund’s and World Bank’s annual meetings.

When Danylyuk took over after Natalie Jaresko stepped down in April 2016, expectations weren’t high, but he has exceeded everyone’s expectations. My colleague Anders Åslund captured it well: Danylyuk has “turned out to be the reform anchor in a government that has been less committed to reform than the previous government, and he has managed to keep the state finances in good order.”

The former investment banker managed to render elusive value-added tax refunds automatic, which pleases many foreign businesses, and has presided over a period of modest economic growth. In September, Ukraine returned to the international finance markets with the introduction of a $3 billion Eurobond, and analysts expect that there may be more offerings. Ukraine’s macroeconomic indicators are good, and Danylyuk has become one of the more convincing reform voices within the government—and someone that Ukraine’s formidable civil society actually respects.

After the Eurobond, some experts worried that Kyiv would have enough cash to coast, and would start to seriously stall on big-ticket reforms like justice, land, and energy. The country would have the cash it needed until the 2019 elections and wouldn’t have to embrace any more of the International Monetary Fund’s nettlesome demands, which require political compromise. (The IMF has insisted that Ukraine establish an independent anticorruption court and that it abides by an agreed upon gas price formula that will result in greater gas prices before it dispenses any additional money.)

Danylyuk tells me to ignore the rumors. He sees the link between the Eurobond and the idea that there will be no more reforms as “totally artificial.” He points out that IMF money goes to the international currency reserves of the National Bank while the Eurobond finances the budget. The IMF agreement stipulated that Ukraine return to the market this year, so the country is on track, he said. Plus, look at pension reform, he said: Ukraine passed pension reform two weeks after it had secured the Eurobond, which shows that reforms aren’t stopping.

Danylyuk praised the IMF multiple times in our conversation. “The country achieved a lot due to cooperation with the IMF,” he said.

Danylyuk is now pressing for a law to reform the financial investigation service (FIS), which will replace the much-hated tax police and economic units of other law enforcement agencies. The new FIS will eliminate pressure on business, he promised, and investigate real economic crimes. He describes it as a “very difficult reform” that is “as difficult as land reform” because it involves the Security Service of Ukraine (SBU), the general prosecutor’s office, and the national police. The law has been drafted but is stuck. “I think the law should be adopted by the end of the year,” he said.

There may be movement on land market reform before Christmas as well. “We need to do it now,” he said. He supports land market reform that would allow all legal transfers to both legal entities and individuals.

In the past, oligarchic factions have used their influence in the Rada to influence the budget. When asked how he will ensure that the 2018 budget is different and free from oligarchic interests, he smiles and says, “By doing it.”

He added they’ve gotten good at minimizing the interests of oligarchs by delivering the budget on time. In 2016, the ministry delivered the budget on time and parliament passed it in its first and second readings on time, which restricts the shenanigans that parliament can attempt. In the past, the budget has been passed in a last-minute, chaotic fashion, inviting abuse. In May 2016, he announced that the ministry would submit a budget on time, which caused a fuss. He eventually persuaded the Cabinet to play by the rules. “We shouldn’t be afraid of disclosure,” he said. “We should be strong enough to submit it and defend it.”

“If we don’t believe in our policies, we shouldn’t be in government,” he concludes.

Melinda Haring is the editor of the UkraineAlert blog at the Atlantic Council. She tweets @melindaharing.

Source: Atlantic Council

Ukraine adopts crucial healthcare reform amid political protests, Financial Times

Ukraine’s parliament adopted crucial legislation aimed at fixing the country’s ailing healthcare system on Thursday, as opposition groups staged a third day of protests calling on the ruling coalition to speed up political and economic reforms. A new healthcare setup based on western models – replacing the remnants of a Soviet system that left Ukraine with one of the highest mortality rates in Europe – was supported by 240 MPs – more than the 226 required for a majority. Officials said financing “will follow patients” covered by state medical insurance, who will now choose their primary care doctors. Doctors that service more patients will see a boost in earnings.

Currently a large share of healthcare funding is inefficiently spent and pocketed by vested interests along layers of bureaucracy, leaving few resources for care and medical professionals’ salaries. Patients are often forced to make illegal cash payments to underpaid doctors. “Passage of the reform will be a positive sign that Ukraine is moving in the right direction and making progress towards becoming a European country,” the healthcare ministry said in a statement ahead of the vote.

The IMF and Ukraine’s western supporters have backed the reform efforts, which have been pushed through despite fierce internal opposition. The successful vote signalled that Ukraine’s pro-western leadership remained capable of pushing

forward with reform efforts, despite growing worries about its commitment and stability.

Concern has mounted that Kiev was failing to keep up with the requirements of a $17.5bn IMF assistance programme that had helped to stabilise the country’s economy after years of conflict with Russian-backed separatists in eastern regions. Earlier this month, lawmakers adopted an overhaul of a dysfunctional pension system, but the IMF has not yet made clear if the legislation was fully compliant with the programme. Foot-dragging on other commitments, including further increases on natural gas tariffs and formation of an independent anti-corruption court are among conditions for securing a long-delayed $1.9bn tranche.

Formation of the new anti-corruption court is one of three key demands of opposition groups and thousands of protestors that have surrounded the parliament since Tuesday, some camping outside overnight. President Petro Poroshenko has pledged to submit legislation on the new court before the end of the year.

Ahead of that, lawmakers were hoping to partially defuse the three-day political standoff on Thursday by adopting legislation in a first reading that would strip their immunity from prosecution. Protestors are also seeking reform of the country’s electoral system.

Author: Roman Olearchyk
New York, NY, Oct. 19, 2017

Source: Financial Times