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Ukraine faces ‘debt tsunami’ in H1 2021
Journal Staff Report

KYIV, Dec 17 – Ukraine faces a “debt tsunami” next year unless the government restarts reforms and resumes cooperation with the International Monetary Fund, Serhiy Verlanov, a former head of the State Tax Service, said.

In an article published by the Financial Times on Thursday, he said the government has failed to heed to the IMF advice on debt restructuring, and instead decided to proceed with a “risky” short-term borrowing plan.

“Ukraine seeks a different way of solving the debt problem, and it may be a mistake,” Verlanov said.

IMF Managing Director Kristalina Georgieva said earlier this month that high level of debt in low income and emerging economies was a serious concern, adding that several governments faced unsustainable debts.

“Our advice is to confront it,” Georgieva said during FT online global banking summit on December 2. “Act decisively on debt restructuring and, when it happens, have the resolution mechanism in place.”

The G20 group of the world’s largest economies developed a common framework on debt treatment for poor countries, under which the IMF will conduct debt sustainability analyses on a country-by-country basis and develop programs to return distressed countries to sustainability.

However, Prime Minister Denys Shmyhal has decided to go ahead with the borrowing plan to raise up to $3 billion in December by selling mostly short-term debt. Ukraine already raised $600 million via eurobonds last week and 51 billion hryvnias ($1.8 billion) via treasury bills.

The idea is to use the proceeds as a short-term ‘bridge loan’ that would buy the government time until the IMF — presumably soon — resumes its lending to the country.

“That’s a very bold assumption,” Verlanov said. “If the year of 2020 has taught us a lesson, it’s that if something can go wrong, it probably will.”

Shmyhal admitted on Thursday that even in the best case the IMF lending is not likely to resume before February or even March.

Ukraine’s economy was crippled by the coronavirus pandemic in the first and second quarters, but those problems will be easily overshadowed by the mounting second wave of the pandemic. The government said a lockdown will be in place in Ukraine for three weeks in January, most likely contributing to economic contraction in the first quarter.

But COVID-19 and its economic impact is only one part of the problem. “The second is the lack of confidence among investors that Ukrainian policymakers are willing to take on the crisis by fighting corruption and restarting reforms,” Verlanov said.

Merrill Lynch, JPMorgan, Citi and Morgan Stanley, the key buyers of the country’s debt last year, have all either reduced their exposure or completely exited their positions, citing rising political risk.

“And this brings us to the main point as Ukraine has to pay about $5 billion in foreign and domestic debt due in the first half of 2021,” Verlanov said, adding that it is implausible to imagine the government will be able to pay the debts without IMF support, which is currently not there.

“Now, add the $3 billion in three- to six-month paper the government plans to issue in December, and you get a true picture of the potential ‘debt tsunami’ that will face Ukraine by June 2021.” (tl/ez)




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