Can Ukraine Avoid Economic Crisis?

The International Monetary Fund is highly unlikely to approve Ukraine's request to restructure $3 billion of loan repayments due this year, but the fact that the government is even considering such a move demonstrates the extent to which it is running out of options, according to Capital Economics.

First Deputy Economy Minister Vadym Kopylov suggested Thursday that the government might try to restructure Ukraine's IMF program agreed at the height of the 2008 crisis. Kopylov said that the $3 billion (2 percent of GDP) of debt falling due this year could be postponed for a period of up to ten years.

Capital Economics reports that it is extremely unlikely that IMF would agree to such a move. It would be possible to reschedule Ukraine's repayments if its current IMF program was on track. But it has been frozen following a stand-off over domestic gas prices.

The IMF has argued that domestic energy prices need to be raised in line with the increase in the cost of imported gas over the past few years if the finances of state-owned Naftogaz are to be put on an even level. The government has resisted, seeking instead to negotiate a reduction in the price of gas imports from Russia.

Capital Economics points out this would not resolve the issue of how the government will raise the $6 billion it needs to service its external debt burden this year.

Neil Shearing, Chief Emerging Markets Economist of Capital Economics, says that issuing debt at interest rates of 8-10 percent is unsustainable for a country that even on the IMF's optimistic projections is likely to record average nominal GDP growth of only 4.5 percent a year over the next three years.

The government is looking for other short-term fixes. According to Capital Economics, the obvious solution would be to roll the debt over as part of the new program. However, that would require progress on the issue of domestic energy prices, which seems unlikely ahead of elections.

Capital Economics says that the government may be able to avoid a financing crisis this year but the public finances are on an unsustainable path.