EcoWeek

Between two chairs

2
015e  
2016p  
119.1  
16.4  
3.4  
16.6  
na  
External debt / GDP (%)  
109.4  
13.4  
2.9  
Forex reserves (USD bn)  
In months of G & S imports  
Debt to the IMF (USD bn)  
14.1  
na  
Short term debt / forex reserves (%)  
Real GDP growth (%)  
Inflation (CPI, average, %)  
Budget balance / GDP (%)  
Public debt / GDP (%)  
-13.6  
50.3  
-3.5  
83.0  
0.0  
1.2  
16.6  
-2.5  
86.0  
0.5  
Current account balance / GDP (%)  
UAH PER 1 USD  
25.0  
30.0  
e: estimates ; p: forecasts.  
Sources: IMF, BNP Paribas  
One step more towards the official default  
projects” will be exchanged for nine new Eurobonds with the principal  
haircut of 20% (USD 3.6 bn) which is a compromise between the  
40% cut demanded by the authorities and the no-cut approach of the  
lenders. The principal repayments will be delayed beyond 2018  
(which is in line with the IMF program) and will continue until 2027.  
The average interest rate will slightly increase from the average of  
7.2% (ranging from 4.95%-9.25%) to 7.75%. Moreover, the debt  
exchange will be accompanied by the value-recovery instruments  
that will start to pay out when the nominal GDP recovers to reach  
USD 125 bn (comparing with the 2015 estimate at about USD 91 bn)  
providing a return equal to 0.15xGDP growth rate if GDP growth  
exceeds 3% between 2021 and 2040.  
On 23 September 2015 Ukrainian government missed the repayment  
of its USD 500 mn bond following the order of the Ministry of  
Finances from 22 September that freezes all payments of a series of  
external government and government-guaranteed bonds. The  
country therefore dangerously approached the official default. Last  
time, Ukrainian government defaulted on its obligations in 1998-2000.  
Debt restructuring is in the process of approval by bondholders. In  
August 2015, the Ukrainian government agreed with the  
bondholder’s committee (that represents about a half of the country’s  
foreign debt) on the restructuring of 13 issues of state and state-  
guaranteed bonds worth of USD 18 bn. The agreement was  
approved by Verkhovna Rada (the Parliament) on 17 September and  
is now in the process of approval by the bondholders. The authorities’  
bonds exchange offer is valid until 12 October. To approve, 2/3  
quorum and ¾ of votes will be necessary for each issue.  
Holdouts’ shade  
Despite the relatively favorable debt exchange terms, several holders  
of bonds maturing in September and October 2015 threatened not to  
approve the restructuring as they feel to bear more losses comparing  
with the holders of longer-term bonds. According to the press reports,  
the potential holdouts may block the decision on some issues. To  
convince them, Ukrainian government proposed to the holders of  
At this stage the ISDA preferred to delay its decision on whether the  
missed payment will trigger the default event on CDS for 10 days,  
offering Ukraine a grace period. The current situation may therefore  
be qualified as being “in between two chairs”: if the bondholders  
officially agree on the offer, the default event and the start of the  
payments on CDS will be avoided.  
“short-maturing” bonds to exchange it for the instruments with the  
earliest maturity (2019), but the position of investors is unknown at  
the time of writing. We therefore view the decision to freeze the  
payments on bonds as a mean of pressure on potential  
holdouts.  
But S&P does not share the ISDA viewpoint. The agency  
downgraded the Sovereign rating to SD (selective default) on 25  
September qualifying the current debt restructuring offer as a  
distressed debt exchange. The agency stresses the loss in value for  
investors from the debt exchange offer and the distressed nature of  
the exchange itself, notwithstanding the fact that the bondholders  
may accept the exchange voluntarily.  
An agreement on another USD 1.8 bn of debt, including bonds  
issued by the City of Kiev, Ukrzaliznytsia (the state railway company)  
and sovereign-guaranteed loans made to state-owned enterprises  
has yet to be reached. Restructuring negotiations have already been  
completed for the USD 2.8 bn in bonds issued by two state-owned  
banks Oschadbank and Ukreximbank  
The terms of the debt exchange are yet quite favorable to creditors  
the operation destroying little value. The USD 18 bn in debt of the  
government and the state-owned company “infrastructure financing  
economic-research.bnpparibas.com  
Anna Dorbec  
2 October 2015 15-34  
5
Russian bond: no clarity  
The question on whether this bond of USD 3 bn, maturing in  
December 2015 is a commercial or official debt remains open. On  
one hand, the bond was issued as a commercial debt and is quoted  
on the Ireland Stock exchange, but on the other hand it is held by  
Russian sovereign welfare fund, which is an official institution. The  
bond was not included in the list of bonds on which the payments  
were frozen. Russia has not asked for its early redemption (despite  
the covenants that allow this). If the debt is recognized as official,  
Russia will be in a position to block the disbursement of the new IMF  
tranches as the beneficiaries of the IMF programs cannot have  
unsettled Paris Club arrears. If the debt is recognized as commercial,  
Russia will either have to agree on the same restructuring terms as  
other creditors (this is the official Ukraine’s offer) or to behave as a  
holdout choosing to enforce its rights in the courts (this seems to be  
a position of Russia’s authorities). In June 2015 the IMF announced  
that the debt may be recognized as official, but up to date the  
institution’s position was not made official. Russia refused to  
participate in the restructuring and is still expecting the bond to be  
repaid in full in December.  
CDS spread 1Y  
CDS spread 5Y  
1
4050  
12050  
1
0050  
8
6
4
2
050  
050  
050  
050  
5
0
2
008 2009 2010 2011 2012 2013 2014 2015  
Source: Bloomberg  
Chart 1  
GDP deflator  
Real GDP growth  
Exchange rate (UAH per 1 USD), right scale  
Easing of external financing constraint  
The debt exchange, if agreed, will substantially ease the external  
financing constraint for Ukraine over the next three years, but does  
not fix the issue fully. The postponement of the principal repayments  
for the remoter period will substantially ease both the government’s  
immediate financing constraint and improve the external liquidity  
conditions. Over the next three years Ukrainian government would  
have to repay more than USD 9 bn in debts: the restructuring will  
allow to disburse slightly less than USD1bn per annum in coupon  
payment over the next three years before repaying about USD 1.5-  
GDP growth  
and deflator,  
yoy  
UAH per 1  
USD  
3
0
0
5
1
1
0
5
5
20  
25  
1
.6 bn per annum (the final figure will depend on the participation  
-
20  
2
rate) over 2019-2027. Total repayments will peak in 2019 at close to  
USD 2.5 bn, which look affordable under the assumption of financial  
stabilization, prudent fiscal policies and a resumption of economic  
growth. However, the debt relief of USD3.6bn which was negotiated  
is far from USD 15.3 bn initially expected by the IMF in the EFF  
program’s calculation. Therefore, the government will have to find  
other financing sources to compensate the lack of revenues. We  
cannot exclude that the EFF program’s conditions will be revised  
once again in the coming quarters.  
011  
2012  
2013  
2014  
2015e  
Chart 2  
Sources: Datastream, UkrStat, BNP Paribas  
Despite the ongoing debt restructuring Ukraine remains a heavily  
indebted country. The external debt reached USD 127 bn mid-2015  
(
101% of GDP, 231% of goods’ and services’ exports), while the  
NBU reserves (USD 12.6 bn or 2.8 months of imports as of 24  
September) are almost exclusively due to the IMF loan (USD 11.4 bn,  
end-August 2015): the external liquidity remains therefore extremely  
fragile. The overall public debt reached 70% of GDP end-2014 and is  
expected to reach 83% of GDP at the end of 2015, driven by the  
increased state’s borrowings to close the external financing gap, the  
GDP fall and the Hryvnia devaluation. The capacity of the authorities  
to run primary fiscal surpluses in the coming two years is conditioned  
to reforms, but also to the improvement in external environment  
(
notably and the raise in global metals and grain prices) and the end  
of hostilities in Donbass, the major industrial basin of the country.  
economic-research.bnpparibas.com  
Anna Dorbec  
2 October 2015 15-34  
6
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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