Ukraine’s Golden Harvest Humbling
Ukrainian shares trimmed double-digit losses despite drought again stifling output at the world’s number three corn producer as near $10 billion in swap and loan facilities were obtained from China, which the Foreign Minister has hailed as an “El Dorado” new ally. A $2.5 billion bilateral currency pool will support trade and combined $6.5 billion in development credit will go to agricultural and energy projects. The infusion came as the $15.5 billion IMF program showed no sign of reactivation with a mission only returning in September just prior to parliamentary elections. The Article IV consultation summary in July cited “fiscal pressure” from wage and pension increases and state gas company obligations that will send the deficit over 3 percent of GDP. With inflation seen at 7.5 percent monetary tightening was suggested along with greater exchange rate flexibility to protect reserves under the $30 billion mark at mid-year, when both Eurobond and Russian bank VTB payments were due. The arrangements were subsequently refinanced, but President Yanukovich has urged exit from the “artificial” 8 to the dollar peg as his Party of Regions tries to maintain business backing in a close race with opposition groups according to opinion readings. Former prime minister Tymoshenko’s bloc has won sympathy for her 7-year jail sentence for malfeasance in office widely condemned as politically-based, while voters are also angry over tax and retirement changes introduced since 2010. Avowed communists claim 5-10 percent endorsements on popular dissatisfaction only muted slightly by the afterglow of European football cup hosting, where infrastructure and stadium construction deals went mainly to well-connected insiders. They have also been able to tap $500 million in offshore syndicated loans despite doubts over the estimated $50 billion in public and private external debt owed this year. Second half sovereign installments to the Fund and World Bank are $2.5 billion, as the government has been unable to sell foreign currency denominated Treasury instruments at home to tackle the hump, according to rater S&P which retains a negative outlook. To free up space for securities purchase the central bank recently lowered bank reserve requirements, but they have their own reimbursement responsibilities to foreign parents as they struggle with a 40 percent NPL ratio.
Poland, which co-hosted the athletic extravaganza, saw stock gains pause with the admission by the Finance Minister of “serious risks” with GDP growth off to a 2 percent pace and high profile bankruptcies in the construction sector which will not be relieved by state aid. Polimex with EUR 600 million in liabilities reached a standstill accord with bank creditors and bondholders for negotiations until year-end while honoring interest demands. The central bank further raised the ante with warnings about souring household mortgages half in swiss francs. Defaults are only 2.5 percent of the total but it found that “macroeconomic spillover” could swamp disposable income and consumption on underwater value.
