Loans prove costly for Ukraine

The financial prospects for Ukraine for the next year are shrouded in mystery. This is not so much due to the fact that the third reading of the budget bill is ahead. The newly-formed government has been offered to implement a budget that it has neither proposed, nor approved, nor even seen. In the meantime, the feasibility of planned receipts, approved on the same day the new premier was appointed, has been generally called into question. In this context, Premier Viktor Yanukovych said on November 25 that the law On the State Budget of Ukraine for 2003, adopted by Verkhovna Rada in the second reading in the wording proposed by the parliamentary budget committee “will be approved neither by the government, nor by the president,” and the latter is sure to veto it.

Ukraine’s accounts payable paint a rather gloomy picture: next year $1.613 billion is due in payments on the foreign debt, another $1.583 billion is due in 2004, and $1.842 billion more in 2005. In late September, Ukraine’s domestic debt totaled UAH 20.7 billion vs. $7.7 billion in direct foreign debt.

Thus before the budget is adopted in its entirety the Finance Ministry should make finding additional sources of funding its top priority. It is no accident that the Wednesday before last Minister Ihor Yushko openly rejoiced at the fact that Ukraine managed to secure $260,000,000 on a Eurobonds issue (vs. $350,000,000 planned initially) carrying 10.8% interest. However, as early as Friday it turned out that the yield on the additional issue of Eurobonds of 2000 with a face value of $260,000,000 was only $219,800,000.

Meanwhile, Ukrainian experts do not wholly share the high spirits of the finance minister. Valery Mahirovsky, chief treasurer at the Enerhiya Bank, told Interfax-Ukraine that borrowing at such an interest rate proves “costly” for Ukraine “according to current market criteria.” Simultaneously, he stressed that “we stood to gain to some extent,” since the placement of Eurobonds happened against the backdrop of such negative factors as the Kolchuga scandal and the downgrading of forecasts for Ukraine by international rating agencies. Incidentally, on Thursday the Fitch International Rating Agency assigned its B rating to Ukrainian Eurobonds, which corresponds to a stable forecast, while previously the Standard & Poor’s downgraded the forecast for Ukraine’s rating from “stable” to “negative.” The US financial company, Merrill Lynch, and JP Morgan Investment Bank have lowered their forecasts for Ukrainian Eurobonds in connection with the downturn in the political and economic situation in the country. At the same time, Fitch has issued a warning that economic and financial forecasts for Ukraine could be downgraded still further, should the government fail to adopt a realistic budget for 2003. Oleksandr Savchenko, chairman of the board of the International Commercial Bank, also believes that “normal countries receive loans carrying only 5% interest.” Thus the government would be better advised to issue bonds tied to the dollar on the Ukrainian market. While the need to ensure a high yield on Ukrainian Eurobonds is, in part, due to “problems with the budget and the shortfall in privatization receipts.”

Speaking to The Day, Oleksandr Narbut, president of the Pulsar Concern, stressed that on the whole the placement of Ukrainian Eurobonds is seemingly successful. However, as he put it, when addressing this issue the government went the easiest, albeit less effective, way. As a result, the potential of the domestic currency bond market, including that of Ukrainian banks, is virtually untapped. Loans taken at a time of government changeover are risky by definition, and their timing is bad. Over the last month, the value of Ukrainian Eurobonds priced in dollars dropped by 5%. Had the government exercised more patience to hold off the issue of bonds for a week or two, it could have received loans carrying a considerably lower interest of no more than 8%.

Clearly, one cannot be denied the right to live off loans. However, according to Volodymyr Maistryshyn, head of the Verkhovna Rada subcommittee for state debt, loans, and investment, the cost of Ukraine’s foreign loans in 2003 will increase still further. “Nothing comes for free in this world. If we have political and economic instability, then, of course, we have what we have,” the subcommittee head stressed.