Ukraine: Back From The Grave

KIEV, Ukraine -- Growing confidence that the International Monetary Fund will back a $14.9bn standby loan for Kiev this week, is encouraging the brave to look around,
Earlier this month, Ukraine cancelled a $2bn 10year eurobond issue after balking at paying 8 per cent or more. It hopes that with the IMF deal in place it will secure cheaper money - and that investors will still be ready to cough up.

“There will be a window for Ukraine to borrow and market appetite will be strong immediately after the IMF approves assistance,” Tim Ash, emerging markets analyst at the RBS, told beyondbrics. “The appetite for Ukrainian corporates has also been strong and is getting stronger.”

Groups of European bankers were seen in recent days visiting Ukraine on scouting missions, seemingly eager to buy fresh debt from a government desperate to cover a budget shortfall.

After adopting a series of unpopular but economically necessary austerity measures in recent weeks, including budget cuts, Ukraine has a strong chance of landing approval for the IMF loan during when the Fund’s board meets on July 28.

Recently, international debt markets, virtually closed since Ukraine plunged into recession in 2008-9 and the last IMF agreement was suspended, have opened up a little to the recession-battered nation’s oligarchs.

Companies controlled by Rinat Akhmetov, Ukraine’s richest man, have raised nearly $2bn through Eurobond placements and syndicated loans. Akhmetov, who is close to president, Viktor Yanukovich, hopes to use the money to expand his dominant position in Ukrainian steel.

But other sectors are still desperate for finance. Domestic banking was hit hard last year, with the European banks which control more than 40 per cent of the market suffering seriously.

Net banking sector losses are down substantially from last year’s $4bn, but are still high - at about $1.1bn for the first half of 2010. Results of a central bank stress test released this month show that at least one third of Ukraine’s 175 banks need $5 billion in capital injections.

“The banking sector in Ukraine remains fragile,” said Martin Raiser, head of the World Bank office in Ukraine. “For Ukraine, the recovery of the banking sector will play a critical role in recovery. Without the flow of credit, investment will remain subdued and this would impact the pace of post-crisis GDP growth.”

Government figures released this week indicate the economy has rebounded robustly from its 15 per cent plunge last year, posting 6 per cent growth year-on-year in the first half of 2010.

But dependent on steel, Ukraine’s top export, the recovery is fragile. A dip in global steel demand in June had an immediate impact on Ukrainian steel revenues. Meanwhile, a recent survey suggests consumer confidence has slipped after steadily recovering for the first five months of the year.

Further pain is ahead, with utility prices up 50 per cent to meet a key IMF condition. And a summer heat wave is scorching the harvest.

So, investors buying Ukrainian bonds for the long-term may be in for a rough ride. But the yields on offer immediately after the IMF deal could be among the most tempting in Europe.