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July 26, 2010 11:16 pm
Only a couple of weeks after Ukraine cancelled a $2bn Eurobond issue, bankers who saw it as a missed and attractive opportunity are now hoping the former Soviet republic will return to capital markets following this week’s expected approval of a $14.9bn standby loan from the International Monetary Fund.
“There will be a window for Ukraine to borrow and market appetite will be strong immediately after the IMF approves assistance,” says Tim Ash, emerging markets analyst at Royal Bank of Scotland. “The appetite for Ukrainian corporates has also been strong and is getting stronger,” he added.
Had the planned $2bn Eurobond gone to market, the 10-year bond would have been Ukraine’s first issue since 2007, but its estimated 8 per cent yield was considered expensive.
However, some European bankers are still keen to buy fresh debt from a government that is desperate to cover a budget shortfall.
After adopting a series of unpopular but economically necessary austerity measures in recent weeks, including a budget sequester, Ukraine is close to securing the IMF loan when the Fund’s board meets on Wednesday. Renewing co-operation with the IMF could serve as a positive signal for the market.
Early this summer, international debt markets opened up to the country’s biggest and most politically-influential businessmen. The vast steel and energy holdings of Rinat Akhmetov, Ukraine’s richest man, have in recent weeks raised nearly $2bn through Eurobond placements and syndicated loans. Mr Akhmetov hopes to use the money to expand his dominance of Ukraine’s steel market, which is ranked among the world’s top 10 exporters.
However, not all the country’s industries are as fortunate.
The fragile domestic banking sector was hit hardest of all last year, denting the books of European banks who hold more than a 40 per cent market share. With non-performing loans in double-digit percentage levels, the mountain of bad debt that needs to be cleaned up is huge. Preoccupied with this effort, banks are still not lending at pre-crisis levels.
Net banking sector losses are down substantially from last year’s $4bn, but are still high relative to the sector’s size – at about $1.1bn for the first half of 2010. Results of a central bank stress test released this month show that at least a third of Ukraine’s 175 banks need an additional $5bn in capital injections.
Experts warn that until banks start lending again, the nation’s economy will struggle to crawl out of recession.
“The banking sector in Ukraine remains fragile,” says Martin Raiser, head of the World Bank office in Ukraine. “For Ukraine, the recovery of the banking sector will play a critical role in recovery. Without the flow of credit, investment will remain subdued and this would impact the pace of post-crisis GDP growth.”
Government figures released last week indicate that the economy has rebounded from its sharp drop last year, reporting 6 per cent growth year-on-year in the first half of 2010.
“The worst is over,” but Ukraine’s shaky bank sector “is not out of the woods yet”, according to Mr Raiser. “The combination of external shocks and weak risk management – in part because of lax supervision – before the crisis has meant that the need for fresh capital is considerable and the process of deleveraging to reach more healthy capital/asset ratios is likely to continue for some time,” Mr Raiser added.
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