finance & markets

Debt of honor

16.01.2015 | By Olena Hubar

In 2014, the Ukrainian government took significant amounts of loans from its international partners. The IMF gave Ukraine US $4.6 bn, another US $3.6 bn was given by other creditors. And while the situation in Ukraine is not changing for the better, there are fears that the country will not be able to repay its debts on time. However, apart from disturbing prerequisites there is hope that the authorities will hold a series of tough reforms, which will help prevent default


Last August Fitch has revised Ukraines ratings to CCC with a negative outlook. At the end of 2014 Moodys Investors Service and the IMF has seen the ratio of public debt to GDP of our country at 68 70% against 41% in 2013. The main reasons for negative assessments the devaluation of the hryvnia, as well as the need for state support of Naftogaz and the banking sector.

Yet even in the most difficult situation Ukraines creditors will be willing to make terms of loans mild and make serious concessions. The current economic situation has all the prerequisites of default. The IMFs fears that default in Ukraine may have systemic consequences is the only reason for which it has not been announced yet. All Ukraines foreign securities are concentrated in the hands of a small group of investors, in this regard, I would consider default as a planned restructuring, which makes it possible to solve the situation step by step, says CEO at OTP Bank Tamas HakKovacs. The only negative effect could be the lack of access to international financial markets, however, Ukraine has been experiencing it for a long time, he added.


In order to avoid default, the government should conduct a series of tough reforms. However, the main question is whether it will dare to take such step, since innovations could be very unpopular with the voters.

First we need painful shock reforms: cutting government spending, drastic reduction in the number of officials along with their oversight functions, termination of subsidies for gas and utilities both for citizens and businesses, says CEO at Kredobank Dmytro Krepak. Simultaneously it is necessary to hold the maximum liberalization and deregulation of the domestic market and foreign trade, so that actual competition developed in the Ukrainian economy, investors came to the country and new jobs were created. Now there is a high probability that each new round of crisis in our unreformed economy will be accompanied by loss of territory and catastrophic social problems all the way down to default, he added.

Experts insist on the need for certainty in future of eastern Ukraine. No matter what the solution of this issue, any confidence is better than a frozen conflict. That is what the investors think, which are not ready to invest in fighting country, says Advisor to the CEO of Eurobank Vasyl Nevmerzhytskiy.

We still have some time next year Europe and the US will be very supportive of Ukraine. And we may count on it making predictions for the balance of payments. However, this cannot last forever. Reforms take time and it is important to start this process now so that in a year or two new rules allowed relying on the inflow of foreign investments not only from donors, says Nevmerzhytskiy.


The entire 2014 the government and parliament were engaged in regular talks with each other. However, experts expect that in the near future their work will be resumed. We need rapid tangible results of the reforms, the socalled Quick Wins that will convince our citizens and foreign creditors of governments commitment. Without this, no one will believe the parade of words or clear plans. And then we may welcome the default, says Krepak.

Financial experts believe that the most acceptable way out for the country will be the further attraction of funds from outside investors combined with prolongation of the existing loans. This will provide a needed respite to enhance economic development and ability to solve political problems.

Partial restructuring of external liabilities, such as exchange of shortterm liabilities to mediumterm maturing in 2017 2019, may become an alternative to default. This will weaken the need for external financing and internal tension in the foreign exchange market, says head of Research Department at Nadra Bank Tetyana Nurmukhametova. The option of conversion of debt is also possible, that is an increase in the maturity of the bonds combined with maintaining of the nominal value and warrant. Such measure makes it possible to carry out reforms receiving financial assistance to defer the payment of loans without increasing the risk of default in order to resume control over the debt burden and restore economic growth, she adds.


Despite that the provision on the free land market was withdrawn from the final version of the coalition agreement, its formation as early as this year is very real. Today there are simply no other resources than farmland, which could promptly bring significant investment to Ukraine.

For now, all foreign investments in the domestic agribusiness are vaguely called investment projects. But even against the background of economic decline and cool attitude to our country among foreign businessmen, the farmers proceed with bringing money into the industry. For example, the International Finance Corporation (IFC) in 2014 fiscal year invested in the domestic agricultural sector US $242 mn (in 2013 approximately US $200 mn).

Foreign corporations were always interested in our black soil. Thus, according to some reports, the Chinese government has set aside approximately US $60 bn for purchase of Ukrainian arable land, in case the moratorium on purchase and sale of land is cancelled. Arab countries, rich in oil but poor in fertile soil, do not lag behind China. We would like to note that only close to 5 mn hectares of 30 mn hectares of arable land are used in agricultural production in our country. Ha. Experts believe that establishment of a free land market will raise the price of 1ha of native lands to US $7,000. As a whole, the country will have an almost fabulous investment resource.

It is known, that conventional agricultural lobby inside the Petro Poroshenko Block is all for the sale of land. At the same time in the Verkhovna Rada there are no longer irreconcilable ideological opponents, which, however, were alike in their rejection of the idea of free land market the Communist Party and the Svoboda.

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