Globally, government debt is at elevated levels and likely to grow – and Ukraine is no exception.
Two of Invesco’s emerging market debt experts discussed their views on Ukraine and its biggests economic challenges in the asset manager’s Global Fixed Income Strategy report for March.
“The biggest economic problem facing Ukraine at the moment is the deep recession,” said Banu Elizondo, emerging markets senior portfolio manager at Invesco. “We expect GDP to contract by around 7% this year. The severity of the slowdown makes the current debt burden unsustainable, in our view.”
Elizondo expects the Ministry of Finance to reach out to debt holders to restructure the country’s debt.
The government has already taken a big step toward addressing these challenges by approving the reform bills suggested by the International Monetary Fund in early March.
The IMF arrangement enables the immediate disbursement of about $5 billion, with about $2.7 billion being allocated to budget support and further disbursements based on standard quarterly reviews and performance criteria.
“While the IMF plans to provide several billion dollars in funding over the next four years, we estimate that there is also a roughly $13 billion debt restructuring implied in this package,” Elizondo said. “In addition to financing, the IMF deal provides impetus for the current administration to push for long-due structural reforms.
She says the agreement may also provide the Ukrainian military time to regroup in the event of further military escalation.
In addition to the IMF agreement, the National Bank of Ukraine also raised interest rates to 30%, which Elizondo said was able to “successfully stop the free fall of the Ukrainian currency, whose stability is critical to ensuring that the new budget and the IMF program are sustainable.”
The country’s economic situation has caused many business leaders’ outlook on Ukraine to deteriorate over the last six months, according to Elizondo’s colleague Jason Trujillo, an emerging markets senior analyst at Invesco.