Ukraine, public finance: government borrowing costs rise, Jan 2022

(for the EIU)

The cost of borrowing from abroad rose for the Ukrainian government in December 2021, according to the National Bank of Ukraine (NBU, the central bank). Ukrainian sovereign Eurobonds are reported as trading at yields of around 9.5% across maturities. 

This reflects recent developments in global economic policy and geo-politics. The key policy announcement is that of the US Federal reserve, which has said it says it intends to wind up its long-running monetary stimulus programme more quickly than planned, and could bring forward monetary tightening, in response to rising inflationary pressures. This has lifted borrowing rates even for countries considered to be relatively risk free. At the same time, the risk premium for lending to Ukraine has gone up in line with threats from Russian leaders of a return to large-scale military action against the country, unless their wider security concerns are addressed, by the US government in particular.

These developments between them raise the prospect of a restriction in Ukraine’s access to international capital markets. This would increase the government’s reliance on IMF funding, and so pressure to comply with IMF loan conditions, in order to maintain confidence in the government’s ability to meet its debt obligations and the economy’s defences against external shocks.

Alongside the impact of high world energy prices and uncertainties linked by the ongoing Covid pandemic—regarding both vaccine rollout and the impact of new variants of the virus—the rise in geopolitical tensions is another factor weighing on Ukraine’s short-term outlook for economic growth. According to the NBU's Financial Stability Report, Ukrainian banks are less reliant than in the past on foreign borrowing to maintain credit growth at home, but the rise in the cost of borrowing from abroad could impinge on the investment plans of private firms, with implications for the balance of payments.

Had successive Ukrainian governments been more successful in creating the market and regulatory conditions conducive to attracting foreign investment, it might have better offset the combination of factors souring investor sentiment to emerging markets in general and to Ukraine in particular. Recent negative headlines in the Ukrainian business press on the treatment of foreign investors are likely to work in the opposite direction, however. In early January, for example, Ukraine’s prosecutor general, Iryna Venediktova, ordered the freezing of the bank accounts of ArcelorMittal, the country’s biggest foreign investor. In late December, news came of a renewables company, TIU Canada, dismantling its solar plant in Dnipropetrovsk region, and pulling out of Ukraine, owing to a drawn-out dispute with business figures assumed to be close to the Ukrainian president, Volodymyr Zelenskyi.

Even if Russia’s threat of a return to large-scale military conflict does not materialise, heightened geo-political risk may add to the factors dampening Ukraine’s short-term growth prospects, while restricting its room for manoeuvre in dealing with external shocks.


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