Ukraine’s Frantic Foreign Fund Manager Mandate

Ukraine external bond yields stayed at 20 percent for the second greatest EMBI loss as the President and Prime Minister after splitting party dominance in parliamentary elections named foreign-born fund managers as Economy and Finance Ministers as the half-year old IMF program further unraveled on Eastern industrial center bloodshed and energy, banking and fiscal cleanup delays. The respective appointees are private and public equity specialists from the US and Baltics and were granted citizenship upon acceptance. They will try to pass overdue budget changes and access supplementary assistance with the 5 percent output contraction due to last into 2015 with 20 percent inflation, and the hyrvnia at half the pre-revolt 8/dollar level on $7.5 billion in reserves, not enough to cover next year’s hard currency debt repayments before gas and other imports. The separate Naftogaz bill next year is estimated at $10 billion and to replenish reserves the $15 billion Fund arrangement may have to double revisiting the urgency of commercial restructuring for sustainability with the 60 percent/GDP public debt threshold for Russian acceleration already passed. Under new guidelines creditors would at least have to extend maturities but outright haircuts may now be sought with Templeton reported as the main international fund Eurobond owner. Ukrainian corporates are not widely-held either with defaults in progress, and quasi-sovereigns may offer debt-equity swaps in workouts. Russian banks have been the dominant buyers since 2008 and they are under their own earnings pressure from recession at home and rollover squeeze from sanctions abroad. The central bank has barely intervened in the ruble crash past 50/dollar and predicated annual capital flight over 100 billion and possible double-digit inflation in 2015. With $70/barrel a fiscal deficit will appear and backstop official funds could be exhausted on state spending and company refinancing demands. President Putin has blamed the troubles on Western conspiracy and his opinion approval remains high although neighbors register historic post-communist doubts over geopolitical intentions. In Moldova Moscow’s proxy party was removed from the ballot and elections before in Latvia dented the Harmony grouping’s traditional strong showing. The premier there kept her coalition on a platform of budget discipline and modest growth with minimal inflation despite lower Russian exports.

Serbian shares pared a 15 percent MSCI drop as the cultural Russian ally renegotiated a 3-year IMF standby of up to EUR 1 billion after the Prime Minister slashed official wages and pensions with the budget gap at 8 percent of GDP. Recession is again set for 2015, but inflation should be close to the 5 percent target allowing potential benchmark rate easing. Auto making has picked up followed by oil and gas exports and Croatia could be next to approach the Fund after presidential elections in December with public debt/GDP at 85 percent and the EU excess debt procedure already in operation. Coastal tourism has been diverted to other cheap Southern Europe spots as vacationers await a fresh mandate.