Monday, March 16, 2015

16/3/15: Ukraine's Government Debt Projections: Smiling IMF, Whinging Private Lenders

Few weeks ago I covered in some details the implications for Ukraine of the latest IMF-led lending package: My projection was for the debt/GDP ratio reaching over 100% in the medium term (2016-2017) based on the timing of disbursal of the new loans package and the composition of the package at the time.

The latest IMF forecasts ( show debt/GDP ratio peaking at 94.6% of GDP in 2015. IMF latest estimate is based on the assumption that, having posted primary deficit of 1.15% of GDP in 2014, Ukraine will return a primary surplus of 1.1% of GDP in 2015. As IMF notes, average primary balance in 2004-2013 in Ukraine was -2.4% of GDP, so, as some would say... 'good luck' with that.

And the programme is also anchored to the private sector-held public debt restructuring. Here's MOU from the Ukrainian authorities on this: "To secure adequate public sector financing in the coming years, while also putting public debt firmly on a downward path, we intend to consult with the holders of public sector debt on a debt operation to improve medium-term debt sustainability. To facilitate this consultation, and in line with international best practice, we have hired financial and legal advisors (prior action). While the specific terms of the debt operation would be determined following our consultations with creditors, it would be guided by the following program objectives: (i) generate US$15 billion in public sector financing during the program period; (ii) bring the public and publicly guaranteed debt/GDP ratio under 71 percent of GDP by 2020; and (iii) keep the budget’s gross financing needs at an average of 10 percent of GDP (maximum of 12 percent of GDP annually) in 2019–2025. The restructuring is expected to be based on the program baseline macro framework applicable at the time the debt operation is launched. The debt operation is expected to be finalized by the time of the first review." Or in more simple terms, the IMF has already pre-committed to Ukraine cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme. Something that is (a) questionable in terms of Ukraine's ability to deliver on, and (b) making a number of very powerful lenders quite unhappy (see

And outside the baseline scenario, here is IMF's assessment of risks to Ukraine's debt profile: "Under a growth shock, entailing a cumulative growth decline of over 9 percentage points in 2016–17, the debt-to-GDP ratio reaches nearly 119 percent in 2017. A real exchange rate shock not dissimilar to the one in 2014 would also keep the debt ratio above 100 percent of GDP throughout the projection period. The combined macro-fiscal shock, an aggregation of the shocks to real growth, interest rate, primary balance and exchange rate, produces unsustainable dynamics, sending debt above 200 percent of GDP in 2017. The contingent liabilities shock highlights the risk of a further deterioration of the banking sector and associated higher fiscal costs. Its impact is mitigated by the buffer embedded under the baseline for larger-than-expected bank restructuring costs. By imposing a large associated shock to growth (14 percentage points below the baseline in 2016–17) and given the resulting deterioration in the primary balance together with an increase in interest rates, under the contingent liabilities shock debt peaks at 116 percent of GDP in 2017."

So in simple terms, I will largely stick with my original estimates that around 2016-2017, we are likely to see Ukraine's government debt around 100% of GDP marker.

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