20180803-法国巴黎银行-CEEMEA_Credit__Ukraine_Update–3_August_2018_8页_269kb

CEEMEA Credit: Ukraine Update – 3 August 2018 Summary

Core Content

This document provides an analysis of Ukraine's economic and financial situation, with a focus on its ongoing negotiations with the IMF, fiscal and monetary policy developments, and market implications.

Key Points

1. IMF Staff-Level Agreement

• The Ukrainian government is expected to reach a staff-level agreement with the IMF under its Extended Fund Facility (EFF) by mid-September 2018.
• If successful, the Central Bank (NBU) would receive the $1.9bn IMF tranche by the end of October, helping to restore year-end reserves to approximately $19bn.
• If discussions are delayed into the autumn, the probability of an agreement before the 2019 elections will decrease.

2. Contentious Issues

• Gas Prices: One of the key conditions for the next IMF tranche is the implementation of an automatic gas price revision system. Ukraine has not increased gas prices in two years, and the pre-agreed formula would require a 45% increase in retail prices as of July 2018. This is a socially challenging move, and the government has proposed lower adjustments.
• 2018 Budget Deficit: The IMF has warned of a potential 1% budget gap due to capital subvention to local budgets. The proposed tax on withdrawn capital at 15% could reduce budget revenues by up to 15% (c.UAH100bn), even with a VAT increase to 22%. A loophole in tax rates for interest payments on non-resident debt could lead to a long-term decline in budget revenues.

3. Anti-Corruption Court (ACC)

• The ACC law was fully adopted by the Ukrainian Parliament in mid-July 2018, meeting the third requirement of the IMF programme.

4. IMF Review and Additional Funding

• A successful IMF programme review in September would unlock the World Bank's $800mn policy guarantee and €1bn in EU Macro Assistance.
• These funds would be paid in two tranches, one in 2018 and one in 2019, and would directly impact the budget, unlike the IMF funds which are recorded as reserves.
• The WB guarantee can be upsized through a non-guaranteed tranche, and the execution may take time.

5. New Issuance in the Eurobond Market

• If the staff-level agreement is signed, Ukraine is expected to issue bonds in the eurobond market, potentially up to $2bn in net issuance.
• The Ministry of Finance has indicated a focus on short-term bonds (2019–2021), with a 7.375% coupon for the 2032 bonds.

6. New IMF Programme

• The current IMF programme has not progressed as planned, with the fifth tranche pending since May 2017.
• Ukraine may need to initiate discussions for a new programme in the near future, with the 2019 budget being a key factor in demonstrating adherence to the 2–2.5% deficit target.

7. Monetary Policy

• The National Bank of Ukraine (NBU) has maintained an independent and proactive stance, raising the key policy rate to 17.5% due to inflation risks.
• The NBU expects to keep a hawkish stance until inflation expectations align with its 6% ± 2% target for the end of 2019.
• The NBU forecasts a current account deficit of $1.9bn or 2% of GDP, supported by higher remittances.

8. Fiscal Risks

• Multiple fiscal risks exist, especially if the IMF agreement is not reached by year-end.
• The Ministry of Finance asserts that the 2018 budget deficit will not exceed the 2.4% target.

9. Economic Growth

• The NBU has revised its 2019 growth forecast down by 40 basis points to 2.5%, citing tighter monetary conditions and waning effects of social payments.
• The 2018 growth forecast remains at 3.4%, driven by private consumption and wage growth due to migration pressures.
• Long-term growth depends on global economic conditions, export demand, and commodity prices (ferrous metals and agri commodities).
• Structural reforms, including improving the rule of law, property rights, anti-corruption measures, privatisation, and financial and land market reforms, are necessary for higher growth.

10. Market Views

• The market outlook remains supportive in the short term, with a "Buy" recommendation for Ukraine's 7.375% 2032 bonds.
• Ukraine is seen as an underperformer in the CEEMEA region, and its bonds may benefit from positive market conditions in August.
• Short-term bonds (7.075% 2019, 2020, 2021) are viewed as having value, especially with the possibility of a tender.

Legal Disclaimer

This document is a marketing communication prepared by BNP Paribas for professional clients and eligible counterparties. It does not constitute investment advice and should not be relied upon for making investment decisions. The views expressed may differ from those of the BNP Paribas Research Department. The document may contain "Research" under MiFID II rules, and access to such content is restricted to those who have signed up for relevant research packages or are out of scope of MiFID II.

BNP Paribas may trade in the instruments discussed and is not liable for any losses arising from the use of this material. The document is intended for specific jurisdictions and may not be suitable for all investors. It is not a prospectus or an offer to sell financial instruments. Legal and regulatory notices vary by country, and the document is subject to the laws and regulations of each jurisdiction.