This morning I’ve finally read a transcript of a Press Conference on IMF Executive Board Approval of the Standby Arrangement for Ukraine, with participation of Ceyla Pazarbasioglu, IMF Mission Chief for Ukraine and Mark Flanagan, Deputy Mission Chief for Ukraine. It was held in Washington on Thursday, 6 November 2008. I would like to share a couple of quotations of mentioned IMF officials.
On current state of Ukrainian economy
Ukraine is a very open economy and has been hit hard with the global economic slowdown and the financial turmoil… Ukraine's economy has grown very rapidly since 2000, expanding more than 7 percent on average. However, by mid-2008, the economy was overheating with rapid credit growth, inflation exceeding 30 percent, very high wage growth, and surging imports. This led to a 7 percent of GDP current account deficit in the second quarter of 2008. At the same time, household and corporate borrowing increased and was mainly in foreign currency. With the sharp decline in commodity prices, especially steel, and the global financial turmoil, this had a considerable impact on the real sector in Ukraine as reflected in the sharp 5 percent contraction of the manufacturing sector in September. After the sixth-largest bank was put under receivership, deposit outflows increased, credit ratings were downgraded, and at the same time, confidence in the country's banking system and currency weakened substantially.
On the worst-case scenario
The worst-case scenario for Ukraine is obviously if the global conditions continue to deteriorate and that there is further deleveraging in terms of the global financial sector. The authority's program already includes a sharp decline in steel prices. The program has actually incorporates most of the new WEO assumptions except the gas and oil prices are higher in the program compared to the new WEO assumptions. So that actually gives a positive impact going forward in terms of higher growth and lower inflation. The key is to balance the adjustment in the exchange rate against the balance sheet mismatches.
On a possibility of a default
The public-sector debt is low compared to other countries; it is about 10 percent of GDP. The private sector does have large external debt service over the coming years. The authorities have been monitoring these carefully. Some of the external debt is from the banks' parents in European countries and the parent banks seem to be committed to their subsidiaries in Ukraine. In our discussions, we were told that they would be rolling over the credit lines to their subsidiaries.
In terms of the corporate sector, a large part of this external debt is actually intracompany loans and that will depend very much on the strength of corporate balance sheets and how many of these loans are actually the companies' own deposits in offshore accounts. This is a difficult component to know exactly in order to calculate rollover assumptions. But with a comprehensive program, especially with a strong bank recapitalization component, there should be possibilities for refinancing for the real sector.
The current conditions show the banking system is adequately capitalized according to the NBU inspections. But going forward as the situation changes, there may be a need for higher capital, and precisely because of that the program has a component of preemptive recapitalization to avoid the spiral of capital crunch, credit crunch, which could lead to the corporate sector not being able to refinance their loans.
The IMF prognosis
Inflation is expected to decrease to 17 percent by the end of 2009 from the projected 25 percent this year. The current account is expected to compress to about 2 percent the GDP deficit from the mid-2008 level of 7 percent.
We assume a global recovery in the second half of 2009 and with that the Ukrainian economy could be back at its estimated potential growth rate of about 5 to 6 percent by 2011 with inflation at single digits. Current account deficits are projected to remain small in 2010.