lorenzo63
Age quod Agis
Ukraine's Economy Is Hostage to Politics
The Orange Revolution of 2004 was supposed to usher in new hope for Ukraine. But at the start of 2010, investors are paying more to insure Ukraine's debt over one year than for any other country, even though default seems virtually impossible with just $400 million of foreign debt falling due this year and $26.5 billion in reserves.
Political risk continues to hold the economy in limbo. Sunday's presidential election brings resolution one step closer; but the risk remains that even February's run-off vote between Prime Minister Yulia Tymoshenko and Viktor Yanukovych, whose victory in 2004 was overturned after street protests, may not generate much-needed political stability.
Whoever wins will face huge challenges. The priority is to persuade the International Monetary Fund to resume payments under a $16.4 billion program. The IMF halted payments ahead of the election when the government failed to push through agreed rises in domestic gas prices and Parliament adopted a budget-busting rise in wages and pensions that could boost the budget deficit by 7% of gross domestic product.
Without IMF funds, Ukraine has had to use foreign-exchange reserves to pay its bills, including for Russian gas. Relations with international creditors have suffered. The economy has been hit hard: GDP shrank 14% in 2009 and will grow only 2.7% in 2010, according to the IMF.
IMF support will reassure markets that reserves can be preserved, easing pressure on the hryvnia, which has fallen 60% against the dollar from its pre-crisis levels, and averting more trouble in the banking sector.
But the new president will need political support to push through austerity measures. If Ms. Tymoshenko wins, she should be able to consolidate power relatively quickly; if Mr. Yanukovych wins, he may push for early parliamentary elections to shore up his support, extending the electoral cycle. A contested result or one which, like 2004's vote, is subject to allegations of fraud will prolong the instability.
Investors will be watching closely. With one-year credit-default swaps at 13 full percentage points, or $1.3 million per $10 million of debt insured, and bonds due 2011 yielding more than 11%, the potential returns are attractive, particularly as risk appetite has reduced yields elsewhere in emerging-market debt. But a flare-up in political instability would hit Ukraine and investors hard.
The Orange Revolution of 2004 was supposed to usher in new hope for Ukraine. But at the start of 2010, investors are paying more to insure Ukraine's debt over one year than for any other country, even though default seems virtually impossible with just $400 million of foreign debt falling due this year and $26.5 billion in reserves.
Political risk continues to hold the economy in limbo. Sunday's presidential election brings resolution one step closer; but the risk remains that even February's run-off vote between Prime Minister Yulia Tymoshenko and Viktor Yanukovych, whose victory in 2004 was overturned after street protests, may not generate much-needed political stability.
Whoever wins will face huge challenges. The priority is to persuade the International Monetary Fund to resume payments under a $16.4 billion program. The IMF halted payments ahead of the election when the government failed to push through agreed rises in domestic gas prices and Parliament adopted a budget-busting rise in wages and pensions that could boost the budget deficit by 7% of gross domestic product.
Without IMF funds, Ukraine has had to use foreign-exchange reserves to pay its bills, including for Russian gas. Relations with international creditors have suffered. The economy has been hit hard: GDP shrank 14% in 2009 and will grow only 2.7% in 2010, according to the IMF.
IMF support will reassure markets that reserves can be preserved, easing pressure on the hryvnia, which has fallen 60% against the dollar from its pre-crisis levels, and averting more trouble in the banking sector.
But the new president will need political support to push through austerity measures. If Ms. Tymoshenko wins, she should be able to consolidate power relatively quickly; if Mr. Yanukovych wins, he may push for early parliamentary elections to shore up his support, extending the electoral cycle. A contested result or one which, like 2004's vote, is subject to allegations of fraud will prolong the instability.
Investors will be watching closely. With one-year credit-default swaps at 13 full percentage points, or $1.3 million per $10 million of debt insured, and bonds due 2011 yielding more than 11%, the potential returns are attractive, particularly as risk appetite has reduced yields elsewhere in emerging-market debt. But a flare-up in political instability would hit Ukraine and investors hard.
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