In Urgent Need Of External Financial Aid
BMI View: Ukraine is on the brink of a major credit event and urgently requires external assistance in order for the government to meet its financial commitments. While we expect the West may provide a small interim loan to allow the country to avoid defaulting on its repayments in April and June, larger financing packages will be on a conditional basis, and we see risks that the government will be unable to implement the associated reforms. The recent devaluation of the hryvnia has also substantially worsened the sovereign credit profile.
In line with our expectations, Ukraine's fiscal situation has deteriorated quite dramatically since our last quarterly update, and we maintain our core assessment that the risk of a credit event over the coming quarters in Ukraine remains extremely high. The fiscal deficit arrived wider than our forecasts in 2013, at UAH63.6bn versus our forecast for UAH54.4bn, or around 4.3% of GDP, primarily due to the US$3bn tranche of financial aid which Ukraine received from Russia in the fourth quarter. We do not expect any further tranches of Russian aid will be disbursed to the current government.
Ukraine remains cut off from international bond markets, with yields on short-end government notes in excess of 25% and is therefore reliant on dwindling FX reserves for external debt servicing. We estimate international reserves dropped below two months import cover to US$14bn in February - a dangerously low level relative to short-term external financing requirements - as the increasingly unstable political situation and weakness in the hryvnia has driven Ukrainians to convert their hryvnia savings into hard currency. International reserves are now so low the authorities have abandoned FX interventions and have instead resorted to capital controls to stabilise the currency.
|Austerity Looms Ahead|
|Ukraine - Government Budget Balance, UAHmn|