Ukraine Markets Daily (April 25, 2017)

Market news

  • IMF sees Ukraine moving towards sustainable growth, pending land, pension and privatization reforms
  • S&P affirms Ukrainian Railway’s rating at SD, the 2021 USD 500 mn LPN at CCC+

Market comment

The UX index increased by 0.6% Yesterday while the PFTS index decreased by 0.1% (in UAH terms). The WIG-Ukraine index increased by 0.7%. On the interbank exchange market, the USD/UAH decreased by 0.2% to UAH 26.62 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 26.73


IMF sees Ukraine moving towards sustainable growth, pending land, pension and privatization reforms

The current cooperation program between the IMF and Ukraine is unique in that it has moved the farthest among the country’s attempts at reforming in its history, and yielded the most significant results since the independence in 1992, the IMF representative in Ukraine Jerome Vacher maintained in an interview to the Ukrainian “Levy Bereg” (Left Bank) online news media, published on April 24, 2017. Among these recent achievements are the reforms of the financial and energy sectors, as well as macroeconomic stabilization against the ongoing war in the eastern part of the country, the official noted. The next key issue is about taking the country towards sustainable development, which is conceivable only pending structural reforms, Mr Vacher said. The land, pension and privatization reforms are virtually the litmus paper of the Government’s resoluteness in carrying reforms, the IMF representative stresses. The issue of the pension reform is very complicated. The current system is unviable in its financial, fiscal and social dimensions. The deficit of the pension system stands at about 6% of GDP; the average pension level is miserably low, while the effective retirement age of the Ukrainian people is fairly below that of peer countries. The issue of special pension allowances has to be addressed the first of all in order to fix the pension system, Mr Vacher explains. As to the land reform, Ukraine has unexhausted agricultural growth reserves, left either unused or only partially exploited, the IMF representative holds. Though the country is a strong agricultural country, the discrepancy between its productive potential and realized production capacity is substantial. A window of opportunities for reforms has opened currently, Mr Vacher maintains. And lastly Ukraine will not stand on the way to sustainable economic development without fixing the issue of corruption, requiring among others the creation of the anticorruption court, according to the official.

Our view:

The IMF statement is POSITIVE, stressing the near readiness of the country to move towards sustainable growth, following the successes in macroeconomic stabilization. We see the current interview to mirror a proactive position of the Fund in the ongoing discussions about the reforms in Ukraine, especially about the pension and the land reforms. Moreover, the statement most likely came to bring light to the issue of rising the effective retirement age under the pension reform, which seems to be poorly understood by many representatives of the Government. We think that the successful adoption of the needed legislation relative to these reforms in the Parliament requires decisive support from foreign experts and partners of the country.


S&P affirms Ukrainian Railway’s rating at SD, the 2021 USD 500 mn LPN at CCC+

On April 24, 2017, S&P Global Ratings (S&P) affirmed the corporate credit rating on Ukrainian Railway (UZ, Ukrzaliznytsia) at 'SD' (selective default), while at the same time affirming the 'CCC+' rating on the USD 500 mn Loan Participation Notes (LPNs) due 2021 issued by Shortline PLC, the finance subsidiary of the Company. No changes in the rating were conceivable considering that UZ is still in default on about UAH 4 bn (c. USD 153 mn) bank loan, representing nearly 10% of its total debt. A completion of the restructuring operation is required before the expiration of the cross-default carve-out for the USD 500 mn Eurobonds on December 31, 2017. In case of failure to renegotiate the debt, the CCC+ rating on the note will come under pressure due to entry of the cross-default clause in effect after UZ is declared in default. Ukrzaliznytsia is currently in the process of negotiating the restructuring of the bank loans, and expected to finalize a deal by end of the current year. Meanwhile, UZ stopped servicing its UAH 4.1 bn debt inherited from the Donetsk Railway, due to a moratorium on payments on the debt, introduced by the Government on February 17, 2017. The development relative to the debt is taken in account in the assessment of UZ rating, though any default on the debt entails no cross-default with the USD 500 mn notes.

Our view:

The lack of improvement in the company’s rating is NEGATIVE in itself, leaving UZ in a default status for the second consecutive year. The unsupportive investment grade restrains the ability of the company to confidently attract the highly needed additional funding for the envisioned large capital investments into its restructuring and modernization programs. Meanwhile, the ongoing covered conflict around the management of the company on background of persisting weaknesses of the banking system and uncertainties with the economic and political environment may complicate the course of the negotiation process in 2017.