Groysman concedes need for gas price hike

Prime Minister Volodymyr Groysman said that Ukraine needs to raise gas prices, signaling that he may be willing to meet a condition from the International Monetary Fund for Ukraine to receive its next loan tranche.

At a press briefing in Lutsk on Aug. 23, Groysman said Ukraine recognizes its obligation to raise gas prices.

“The question of raising gas prices is very difficult,” he said. “There are obligations that gas prices will have to grow amidst the growth of the global gas prices. I have been holding back this situation for a year… However, now there is a question of another increase.”

According to the Vinnytsya-born politician, the increase in gas prices is the key to continuing raising funds in international markets.

“This requirement arose because we need to work with external loans,” he said.

The National Bank of Ukraine and the Finance Ministry had earlier anticipated $2 billion from the IMF in 2018.

“Receiving less than the planned amount will make financing budgetary spending more difficult,” the NBU stated on July 12, according to which the main risks Ukraine will face are “capital outflow, economic downturn, and high labor migration.”

And though Groysman did not specify the percent by which the gas price will up, it now may range from 30 to 60 percent, according to various estimates.

It remains unclear if the increase will bring gas prices in line with import rates, which is the change that the IMF has insisted on.

Only a year ago Groysman said there was no reason to raise gas prices as much as by 18 percent, the digit proposed by the IMF at the time to “reach the market level” price.

Price hikes generally seem to be an unpopular move, for it would have to be implemented before the heating season in Ukraine and might irritate people before the presidential elections in the spring of 2019, according to market players.

But there’s a separate logic to the price hike: Ukrainian oligarch Dmytro Firtash, fighting off extradition to the United States from Vienna, is accused of making billions in arbitrage off the difference in prices between household and industrial consumers. Prolonging the increase in household gas prices has allegedly allowed him to continue to accumulate cash off the scheme.

Ukraine’s economy needs the IMF money to keep afloat, analysts say. Ukraine has already received more than $13 billion in loans from IMF, and the government used it mostly to refill the budget ($5 billion) and the foreign currency deficit ($8 billion).

The gas price hike was also supposed to stimulate domestic production and prompt Ukraine to stave off dependence on Russian gas imports.

Groysman made the last gas price increase in April 2016, which equalized the amount Ukrainians were paying with import prices at the time. This decision, however, put pressure on households in Ukraine, which had grown accustomed to heavily subsidized rates. Now many people cannot afford to pay their utility bills; many receive subsidies from the government.

Ukraine received the last $1 billion loan tranche from IMF’s total $17.5 bailout program in April 2017. The halt in the program occurred amid various unfulfilled demands, including the anti-corruption court, budgeting issues, and the gas price issue.

Source: Kyiv Post

Ukrainian hryvnia drops, highlights need for IMF tranche, foreign investment

Over the last three weeks, the Ukrainian hryvnia has lost nearly four percent of its value against the dollar from Hr 26.23 on July 16 to Hr 27.13 on Aug. 7.

While the depreciation is viewed as a natural phenomenon, economists express concerns that the sliding will intensify if Ukraine doesn’t secure the next tranche from the International Monetary Fund’s loan program.

Seasonal fluctuation

Economists say that for Ukraine, an agricultural powerhouse, slight oscillations of exchange rates aren’t out of ordinary. The hryvnia depreciation usually starts during the fall as farmers’ demand for foreign currency goes up during the harvest season. This decline in value continues during the winter season due to higher spending on energy for heating.

Besides regular seasonal effects on currency rates, the National Bank of Ukraine said that the depreciation has also been caused by the transfer of dividends abroad. Following the mid-year shareholders’ meetings, companies bought nearly $300 million to repay dividends.

In addition, foreign holdings of government bonds have dropped by Hr 1.3 billion ($48 million) since the beginning of July.

“Foreign investors bought short-term hryvnia treasury bills in February-March expecting the usual hryvnia appreciation in spring-summer,” explained Hlib Vyshlinsky, executive director at the Kyiv-based Centre for Economic Strategy.

He said that deregulating the foreign exchange market in line with the European Union’s directives will make the market less prone to seasonal fluctuations.

In July, the Ukrainian parliament passed a law that liberalizes foreign currency transactions and is aimed at attracting more foreign capital to the country.

Alexander Valchyshen, head of research at the ICU Investment Group, believes that the recent currency depreciation is standard for emerging market economies and reflects the adjustment to the changes in the global economy.

The hryvnia remains dependent on prices of commodities like steel, soybeans, grains, oil, and gas. And recently the markets have been hit by the trade standoff between the United States and China after the world’s two largest economies mutually imposed import tariffs on energy and agricultural commodities.

Valchyshen said that the hryvnia-to-dollar exchange rate is driven by a variety of factors. One of them is domestic businesses suffering from a lack of financing.

“Access to credit, or lack of it, is a key factor that hides the fragile financial position of the private sector, especially those businesses that borrow short-term while investing long-term,” he wrote.

It may seem that Ukraine’s economy is doing well as the real gross domestic product went up by a little over 3 percent in the first half of this year. But amid soaring exchange rates, it’s unlikely the economy will grow, Valchyshen reckons.

“Ukrainian borrowers, both government and businesses, have sizable foreign currency debt refinancing needs and the increase in exchange rates is a burden for them. Hence, future growth prospects are about to slowdown or, in the extreme, [there could even be] an outright recession,” Valchyshen wrote.

IMF financing

The bad news is that the Ukrainian government is short of money. The lack of IMF financing remains the key near-term risk for the economy and for the national currency, said Olena Bilan, chief economist at the Dragon Capital.

The IMF loan program for Ukraine expires next spring, and so far the country has received $8.4 billion out of a designated $17.5 billion for reform assistance. The international lender has been particularly pushing for the creation of the anti-corruption court and raising gas tariffs for households.

In addition, the Ukrainian government has to repay $6 billion of external debt by the end of 2019.

Bilan expects the negative trend to remain in place in the coming months and forecasts the rate Hr 29.5 against US dollar by the year’s end, assuming that Ukraine secures the next IMF tranche and unlocks related budget financing for debt repayments.

“Failure to secure the next $1.9 billion IMF tranche would keep the government cut off from external budget financing, making default virtually inevitable. It will be very difficult to preserve macroeconomic stability in such an environment,” Bilan commented.

Vyshlinsky agrees. He predicts a moderate depreciation close to around Hr 28 per U.S. dollar, if the IMF lending resumes. Without it, he said, the hryvnia may fall below 30.

“I reckon that the government fully understands this risk, and will finally pass the needed decision on gas prices in August,” he told the Kyiv Post in a written reply.