Ukraine raised $3 billion in dollar-denominated eurobonds to be repaid in 15 years at 7.375 percent interest annually, the government announced on Sept. 18.
Most of this sum — $1.7 billion — was a debt exchange, so old short-dated debt was swapped for new longer-date debt. This improves the maturity structure and alleviates one of the weaknesses for Ukraine, which was the peak in debt service in 2019-2020.
Second, while there was a new debt component of $1.3 billion, if you assume that Ukraine is going to run a budget deficit still this year of 2 percent of gross domestic product or so, then it was always going to issue debt and at least with this deal Ukraine’s financing needs have more or less been covered to year end.
Third, in terms of cost, a 7 percent-plus annual interest rate was not that expensive for Ukraine, given the risks and historic perspective. I seem to remember that Ukraine came to market in the past, issuing at 11 percent. So 7 percent-plus does not seem unreasonable. And if Ukraine continues with reforms, and generates strong rates of GDP growth, this level of debt and interest should still be sustainable.
Fourth, I am not sure President Petro Poroshenko should get overly complacent that this is a big vote of confidence in him or the reform story. (Interfax Ukraine news agency quoted Poroshenko as saying: “Never before has Ukraine raised such a sum, never has it raised it under a 15-year maturity. This is an unbelievably positive assessment by investors of the reform” program.
The reality is the global financing conditions at present are good for everyone. Think of it this way, with quantitative easing from developed market central banks there is too much money chasing too few bonds and this means bond prices rise and yields go lower. Lots of challenging credits have been issued recently, and cheaply with a low yield — think there Tajikistan, Belarus, Iraq, Bahrain, all less than 8 percent. So I would be careful to read too much into this.
Actually I think you could say the reform story in Ukraine is currently going slow, with the International Monetary Fund program stalled, but top-down factors in the global economy rather than bottom-up country fundamentals are dominating at present.
The concern I have is this idea of complacency.
If Ukraine’s policymakers take this deal as evidence of their successful policies they may continue to go slow on reforms. The market at the moment is too forgiving. Also if you can borrow cheaply from the market, why borrow from the IMF which attaches difficult reform conditions?
There will be little pressure now on the Poroshenko government to keep on track with the IMF program as they don’t need the money. Now, you may say fine. But ultimately IMF reforms improve the long term resilience and durability of the economy. If you neglect them, you leave yourself vulnerable when the market eventually turns less forgiving, and it will.
For me the key test of reform is the rate of real GDP growth, and 2.4 percent is disappointing, given the very low base.
Imagine Turkey, with all its political, security and geopolitical risks, and a higher base grew at 5 percent or thereabouts in the first half of this year. Ask yourself why Ukrainian growth lagged and it was because of the lack of foreign and domestic investment – which mostly relates still to the poor business environment and endemic corruption.
And on corruption I see little progress, and little real willingness to address the issue – just to partake in window dressing, with no bandits ever going to jail.
But if you don’t address corruption you will not get investment and growth and then ultimately Ukraine will not be able to pay back the foreign debts it is currently accumulating.
