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Fitch: Ukraine Bond Issue Is Positive but IMF Funding Still Key
September 22, 2017 / 1:50 PM / 3 months ago

Fitch: Ukraine Bond Issue Is Positive but IMF Funding Still Key

(The following statement was released by the rating agency) LONDON, September 22 (Fitch) Ukraine's return to the international bond market reduces refinancing risk and boosts reserves, supporting the country's sovereign credit profile, but official lenders (chiefly the IMF) remain the cornerstone of both Ukraine's external financing and its commitment to reform, Fitch Ratings says. Ukraine (B-/Stable) raised USD3 billion of 7.375% 15-year bonds on Monday in its first international issue since the crisis triggered by Russia's military intervention in 2014 and Ukraine's subsequent debt restructuring. The issue attracted orders of USD9.5 billion from around 350 investors, according to the Ministry of Finance. The strong demand highlights the progress the Ukrainian authorities have made in correcting economic imbalances and strengthening the country's macroeconomic policy framework. The deal reduces refinancing risk as a portion of the proceeds will be used to repurchase USD1.6 billion of notes maturing in 2019 and 2020. And it will further increase reserves, which had climbed to USD18 billion in August from USD15.4 billion in January, partly due to the latest IMF disbursement (USD1 billion following the conclusion of the programme's Third Review in April), the second instalment of the EU Macro-Financial Assistance Programme of EUR600 million, and sales of FX by residents. Sustained bond market access would improve external financing flexibility, but until Ukraine has re-established a track record of issuance, multilateral and bilateral support will remain the key source of balance-of-payments and budget financing. Fitch does not anticipate a strong pick-up in FDI inflows in 2017-2018, leaving official disbursements (mostly from the IMF) to provide the bulk of net external financing. We believe that the IMF programme also underpins the confidence and reform momentum that supported Ukraine's bond market return and helps ensure support from other official sector creditors. Further disbursements under the Extended Fund Facility will depend on the government's structural reform efforts. The government has indicated that it wants to move swiftly on pension and land sales, both key IMF reform benchmarks. But reform fatigue and delays in execution present risks, particularly as the emphasis shifts towards introducing and sustaining politically and socially sensitive reforms such as gas tariff adjustments. Meeting deficit targets (2.5% of GDP in 2018 and 2.3% in 2019) will probably require additional measures due to spending pressures, notably from pension transfers and wages. We think the government remains committed to reform, and the IMF has shown flexibility in its programme assessments (Ukraine completed just five of 14 structural benchmarks for the Third Review). However, maintaining momentum in areas such as privatisation and tackling corruption may prove challenging, as highlighted in recent comments by IMF official David Lipton to the Ukrainian press. The approach of the 2019 elections may also weigh on reform momentum. Given the importance of multilateral support, our sovereign rating assessment is focused on the credibility and consistency of Ukraine's policy framework, sustained strengthening of external buffers, and progress of reforms intended to improve macroeconomic performance (most notably growth prospects) and to cement fiscal consolidation, in line with Ukraine's IMF programme targets. Contact: Erich Arispe Director, Sovereigns +44 20 3530 1753 Fitch Ratings Limited 30 North Colonnade London E14 5GN Paul Gamble Senior Director, Sovereigns +44 20 3530 1623 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 . Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings Related Research Emerging Europe Sovereign Credit Overview here Ukraine here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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