The IMF may have to rethink its toolkit if it is to provide Ukraine with the help it needs, according to Yuriy Butsa, Ukraine’s government commissioner for public debt management.
Speaking to Euromoney while holding discussions with US-based investors, Butsa says that Ukraine’s situation poses unique challenges for an institution that was not created to help finance countries at war but rather to extricate them from economic crises that are often of their own making.
“Ukraine is not an Argentina or a Sri Lanka,” he says. “It was Russia’s invasion of Ukraine that caused all the problems, not bad policies.”
In July and August, Ukraine reached debt restructuring agreements with Paris Club and G7 lenders, as well as with international bondholders. Now it faces its next challenge: to secure an IMF programme that central bank governor Kyrylo Shevchenko has said could be in the order of $15 billion to $20 billion, to help the country fund its deficit until it is able to restore more traditional access to the market.
What makes agreement difficult is that IMF programmes typically require the recipient country to put in place a credible plan for repayment. For Ukraine’s ultra-volatile situation, that is close to impossible, even if officials like Butsa maintain a resolutely optimistic view of the eventual outcome.
“It is very hard to have discussions on a long-term macroeconomic view because no one central scenario is credible,” he tells Euromoney. “We don’t yet know when we will win the war.”
Budget deficit
Since Russia launched its invasion of Ukraine on February 24, Ukraine has faced a deficit of about $5 billion each month, much of which has so far been financed through local government bond issues and bond-buying by the country’s central bank, the National Bank of Ukraine (NBU).
As of August 30, Ukraine state budget financing totalled $31.5 billion since the war began, with the NBU providing the largest portion, at more than $9 billion. The biggest bilateral source of funds has been the US, with nearly $7 billion. Funds from the IMF, the World Bank and the European Investment Bank total about $3 billion.
The potential need for policy changes or new tools has brought IMF board representatives into the discussions, in addition to the usual technical debates with other staff.
Whatever IMF programme that emerges is not being seen as the cure for all problems. Butsa says that the government is close to finalising the budget for the coming year, and that it will involve domestic cost savings to narrow the deficit as far as possible.
The country is also engaging with its traditional grant donors – a critically important constituency if the country is to avoid a debt-sustainability problem when it is in a position to return to traditional funding markets.
Monetary financing will also continue in the meantime, and Butsa argues the money-printing machine is sustainable for now.
“We are also repaying the bonds held by the NBU, so on a net basis it is smaller and we don’t see it having a big impact on inflation at the moment,” he says. “But of course, this will become less sustainable over time.”
Annual inflation in Ukraine reached 22.2% in July.
Bondholder agreements
Butsa spoke to Euromoney on September 1, the very day on which it would have been required to make $1.2 billion of principal and coupon payments on one Eurobond had it not already reached agreement with bondholders.
Another $1.355 billion issue matures on September 1, 2023, and a $750 million issue on February 1, 2024.
Ukraine has 13 series of Eurobonds outstanding, and each series got the required vote of more than 50% in favour of amending their terms. The deal also needed the agreement of two-thirds of aggregate principal holders, and achieved 75%.
After announcing on July 20 an agreement with Paris Club and G7 lenders, whereby debt servicing would be postponed to the end of 2023, with a further option to extend the moratorium by another 12 months, Ukraine also launched a consent solicitation with holders of its Eurobonds and certain GDP-linked warrants to put all payments on hold for two years.
Consent for such changes was announced on August 10.
Our regular communication with market participants clearly showed that the holders of our bonds would prefer us to defer payments and that they understood the need for the country to preserve liquidity
Yuriy Butsa
Ukraine’s GDP warrants, designed to be a quasi-equity instrument that would allow holders to share in the country’s recovery after a previous restructuring of Ukraine’s debt in 2015, were a particular headache. Reaching agreement on those was where the bulk of the negotiating focus was placed, with big holders wall-crossed in order to thrash out the details.
The complications stem from the way in which payments to warrant holders are determined. If a sharp contraction – like the 30% fall that many expect Ukraine’s economy to suffer this year – were to be followed by an even sharper rebound, it would create huge payouts.
“That structure means that any volatility in GDP growth can result in big payments, and it is not fair for Ukraine to be paying for that volatility,” says Butsa.
The work paid off: holders of 93% of notional warrants outstanding took part in the consent solicitation, and 91% voted in favour of the amendments.
Simpler restructuring
Things were slightly simpler when it came to the country’s Eurobonds, where extensive discussions had taken place since the start of the war and for which holders were well prepared, in spite of Ukraine’s stated intention to avoid restructuring if at all possible.
For the first few months after Russia invaded Ukraine, officials like Butsa were maintaining a steadfast commitment to servicing the country’s external debts. Over time, however, that has been an increasingly challenging position to maintain.
“When the war started there was obviously much uncertainty, and we did not have external commercial funding available,” says Butsa. “We hoped we would be able to replace that with assistance from international partners, but that was slower than expected. So we had less funding than we needed and had to rely on monetary financing to fill the gap.”
Many observers saw some form of eventual restructuring as inevitable, however, and bondholders had regularly communicated their preference for some form of agreement to be reached, rather than face a less orderly problem later.
“Our regular communication with market participants clearly showed that the holders of our bonds would prefer us to defer payments and that they understood the need for the country to preserve liquidity,” says Butsa. “The only practical window for the formal consent solicitation was July, but we had been taking suggestions from the market prior to that over the summer, in parallel to our talks with the Paris Club on official debt.”
