Сapital outflows to outweigh any ‘friendly’ money from Russia, China
Investors didn’t take kindly to Ukraine’s rejection of a far-reaching free trade deal with the European Union. Immediately after the debacle in Vilnius on Nov. 28-29, and continuing this week, prices for Ukrainian eurobonds – rated as “junk” by credit worthiness agencies – dropped as their yields spiked keeping Ukraine’s sovereign debt the third most expensive in the world after Argentina and Venezuela.
Yield-to-maturity on Ukrainian eurobonds were as high as 19 percent, but were down to above 12 percent as of Dec. 4.
“Investors would’ve preferred for the Vilnius (association) agreement to be signed,” Tomas Fiala, chief executive officer of Dragon Capital, said at a conference on Dec. 3 organized by the Kyiv Post. “There’s no country in Africa that borrows more expensively than Ukraine.”
The gloomy investor sentiment is a reflection of what Kyiv-based investment boutique Investment Capital Ukraine calls a “painful extension of the status quo,” or a muddling through policy that favors decisions that focus on short-term loans – comprising mostly of bonds – to keep the dollar-pegged hryvnia currency stable.
The policy runs counter to what other countries have done to recover from the so-called Great Recession that reached a global scale in 2008-2009. Instead of loosening monetary policy and letting the hryvnia reach a realistic level of around Hr 10 to $1, and promoting foreign direct investment which would in the mid- to long-term lessen the burden to borrow, Ukraine has gone against the grain.
The idea is that by enticing investors to park their money in Ukraine, production capacity would blossom in the mid-term for local and export markets, which in the long-run would balance out Ukraine’s $13 billion current account deficit.
Already in its fifth consecutive quarter of recession, Kyiv faces $9 billion in foreign debt repayments next year, according to Fiala. Foreign reserves at the end of November are near $19 billion, enough to barely cover less than three months of imports. Meanwhile, the nation also is slated to import about $13 billion more than it exports next year, said Fiala.
He noted that in the first 10 months of this year foreign direct investment (FDI) sunk by more than 50 percent to $2.4 billion whereas last year it stood at $5.4 billion in the same period. Next year, investors are expected to follow a wait-and-see policy with the presidential election campaign kicking into gear.
Moreover, said Serhiy Yevtushenko, director of the state-run InvestUkraine agency, investor trust has tanked following Ukraine’s last-minute decision to postpone signing the EU treaty.
“As a person who deals with investors and investments…Trust and predictability are two key items that are absolutely necessary for positive investment decisions,” said Yevtushenko. “Perhaps this was the right decision, but the fact that it was made in the last week (before the Vilnius summit), was the biggest mistake which will seriously place doubt on Ukraine’s trustworthiness in the investment community, among international partners, and towards the nation’s economic policy.”
Thus, Ukraine must make clearly visible and short-term fiscal decisions that investors will understand to “create a bit of a positive window for the next year,” said Fiala, adding not much time remains before a level will be reached “when the spiral will be difficult to stop.”
Fully realizing this, Kyiv’s leadership has gone “shopping” for cash, said Oleg Ustenko of The Bleyzer Foundation at the Kyiv Post Dec. 3 conference. Delegations have gone to China and the EU with Russia next on the list.
Reuters reported on Dec. 5 that Yanukovych signed a potential $8 billion deal with China during his three-day visit there, but this is mostly long-term agreements, not the short-term cash that Kyiv needs in the range of $10-$15 billion.
But even if Ukraine gets money from Russia or China, it won’t be enough to cover the wave of capital flight that is expected after the summit in Vilnius, said Polish Foreign Minister Radoslaw Sikorski.
“I’m surprised to hear that Ukraine expects funding from a country that introduced economic sanctions (Russia),” said Sikorski in Vilnius. “Well, good luck. I’m willing to bet that an outflow of capital from Ukraine will be greater than any financial support (from Russia).”
In a note to investors this week, ICU stated that any new loans from either the Kremlin or China “would provide little improvement to the economic fundamentals that have been long deteriorating.”
Fiala also added that any “friendly” money Kyiv gets from Russia “will be only government or political money which won’t be sufficient to balance out the outflow of private investment both local and international.”
That prospect was not lost on Deputy Prime Minister Oleksandr Vilkul who stated the nation is looking to shore up its macroeconomic outlook. Vilkul said the nation is pursuing a “road map” which entails resuming talks to unlock a cheap loan from the International Monetary Fund.
Whatever choice Kyiv makes by the end of the year, must be clear to investors, “otherwise business just won’t understand,” said Yevtushenko. “Everybody will wait, and we’ll have investment postponed (indefinitely), and this will last until Ukraine makes a determinant decision.”