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8:29 AM Friday, December 15, 2017
Finance
​Ukraine Expects to Get IMF Tranche by Year-End, Danylyuk Says
IMF $$ Depend on Gas Formula and Rada Adopting Privatization Law, Danylyuk says in Washington; Timothy Ash Analysis
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By Olga Tanas

(Bloomberg) -- Ukraine expects to get its next loan tranche
from the International Monetary Fund by the end of the year,
assuming that an agreement on its price-setting formula for gas
can be reached, said Finance Minister Oleksandr Danylyuk.
“We’ve made progress in talks on the gas formula. We
haven’t reached final agreement yet, but we’ve set principles,”
Danylyuk told reporters on Sunday in Washington, where he’s
attending the annual International Monetary Fund meetings.

Oleksandr

Finance Minister Danylyuk is in Washington this week seeking to keep Ukraine's IMF reform package on track (UNIAN/Anastasia Sirotkina)

“We have to find a formula, which will set prices on gas

for a period until full liberalization of the gas market,” he
said. “We’re working on that, and I don’t think we need a lot of
time for that as we had quite informative meetings here,
exchanged positions and now we have to draft that.”


Ukraine is struggling to complete measures required for it
to secure a $1.9 billion tranche from its IMF-led bailout loan
of $17.5 billion. The last $1 billion loan-tranche transferred
in April was delayed by months, while the next chunk is being
held up as reforms take longer than planned.


“We expect the next tranche by the end of the year,”
Danylyuk said. Adjusting gas prices to “import-parity” levels
was one of the provisions of the IMF loan. “How to calculate
that, what it will lead to -- we’re working on it,” said
Danylyuk.


Another condition is the adoption of the law changing the
process of privatization, which has already been submitted to
the parliament, according to the finance minister.

--With assistance from Daryna Krasnolutska.


To contact the reporter on this story:
Olga Tanas in Washington at otanas@bloomberg.net


Timothy Ash writes:

In the end, getting IMF money this year will be the best case scenario. More likely, Q1, with the ball firmly in the government’s court. The longer all this drags out the closer we get to elections due in 2019, and campaigning. Some would say that the campaign has already begun.

The IMF clearly are digging their heels in over energy pricing, as this was something that had already been agreed in the 3rd review back in April, and cash already dispersed on a promise back then. Really it is about the government agreeing and sticking to a formula that takes the discretion out of energy pricing and hence removes a major source of graft. IMF officials likely find it hard to go to the IMF board and argue for a pass for Ukraine on an issue which is clearly one of backtracking. Remember energy sector reform has been one of the big wins thus far rolled out since Euromaidan.

The problem on the energy pricing issue is that PM Groysman has made very public and political statements that there will be no gas price hikes. These increases were supposed to have been announced in July, in the energy off season. But the heating season now has started, so the whole issue of gas prices is moving closer to center stage. If Groysman has to backdown, this will represent a loss of political faith for him as we head closer to elections.

At this stage I cannot see an IMF mission being sent (bar any technical mission to look at the budget for 2018) to negotiate the next review until the government now makes concessions over the gas issue. Also bubbling away are controversies over corporate governance at Naftogas. The fact that Naftogas now is profitable adds to the difficulties all around. Some will argue that the company can foot the bill of stalling gas price hikes. That would set back many of the highly successful reforms already put in place by the new management, and also plans for critical investment.

It is fair to say that questions are being asked in D.C. as to the commitment of the Poroshenko administration to staying on this program in the run up to elections. If they are going to deliver on further IMF related reforms, it likely will have to be sooner, rather than later and especially closer to the looming elections.

The government likely will want to keep the market warm with messaging around IMF engagement to keep market access and financing options open. We have seen that play out many times before, in Turkey, Hungary, Zambia, et al. Success also depends on global financing conditions remaining supportive. It will be interesting to see how much of a penalty, if any,


Timothy Ash is senior sovereign strategist for emerging markets at BlueBay Asset Management in London and a member of the UBJ Editorial Board. the market gives Ukraine for delays on the IMF front, which will also perhaps depend on how the government and IMF both message this.

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