Ukraine is planning to take the first step in restructuring its foreign-owned sovereign debt as the government seeks to preserve cash for a drawn-out war with Russia.
The finance ministry will on Wednesday ask foreign private creditors to agree to a delay in debt repayments, according to people with knowledge of the process. Ukrainian news outlet Economic Truth reported on Tuesday that the cabinet had signed off a request for a two-year repayment moratorium on $3bn of outstanding Eurobonds. A rescheduling would amount to a Ukrainian default.
The move marks a U-turn for Kyiv. Since Russia’s full-scale invasion began on February 24 it has insisted on meeting its obligations in full in order to maintain the confidence of international investors and market access, despite pressure from some official creditors to delay payments.
Since February, Ukraine has paid some $1bn in redemptions and interest to external creditors while appealing to its allies for financial assistance to plug a budget deficit of $5bn a month.
Although western financial support has increased since May, Kyiv is still counting on the central bank to buy its debt by selling foreign reserves or printing money, at the risk of setting off an inflationary spiral.
Speaking to the Financial Times in Kyiv a day before the restructuring announcement, Ukrainian finance minister Sergii Marchenko said it was “very risky” for the country to rely on the central bank monetising its debts for much longer.
He also urged the IMF to agree to a new multibillion-dollar bailout for Kyiv.
“We are ready for such a discussion,” Marchenko said. “I believe the IMF is also open to such a discussion. I believe we can move faster. We need to understand what we need to do in 2023.” Marchenko refused to comment on a possible default.
A restructuring appeared likely after energy company Naftogaz last week became the first state entity to seek to restructure its debt. Naftogaz did not need to do so, but was instructed to by the government, according to people familiar with the decision-making process.
Kyiv’s about-turn was also signalled by Oleg Ustenko, an economic adviser to President Volodymyr Zelenskyy who told new outlet RBC Ukraine, on July 9 that a delay to debt-servicing was merited.
“When the war has been going on for the fifth month in a row, when it is not known exactly when it will end, then it is illogical to worry about the fact that you will not be able to enter foreign capital borrowing markets for the next year or even two years,” Ustenko said.
Marchenko said Ukraine’s budget crisis was “quite stable”. The country still needed $5bn a month to plug its deficit. Western donors and international financial institutions provided $4.4bn and but they would send “less than $4bn” in July partly because of delays in the EU over disbursing a promised €9bn aid package.
Marchenko said that while it was normal for the National Bank of Ukraine to temporarily monetise government debt at a time of war, it would not be sustainable for much longer.
“It is risky if it is long-term or high amplitude. In 2023 we need to avoid monetary printing by the NBU,” he said.
Marchenko said the government needed to cut spending in order to rein in the deficit, but it was difficult to find savings when the bulk of expenditures went on welfare payments, the military and debt interest.
Economists have warned that Ukraine is heading for a financial crisis unless it curbs the deficit and devalues its currency, the hryvnia.
In an article published earlier this month, Oleg Churiy, a former deputy governor of the central bank, and Yuriy Gorodnichenko, a professor of economics at Berkeley, said macroeconomic policy was unsustainable with fiscal retrenchment, a devaluation and higher tariffs on imports.
Ukraine’s foreign reserves could run “dangerously low” if the NBU continued foreign exchange interventions to sustain the level of the hryvnia and external debt repayments.
Marchenko said he would not comment on exchange rate policy but said the government was “looking at some possible additional import tariffs” to help preserve foreign currency.
Source: Economy - ft.com
