The Council of Europe and the European Parliament must approve the decision.
Negative news background prevents Ukraine from attracting investors' money to finance the state budget and pay debts. The authorities are counting on official support from Western allies, which will allow the country to cope with its obligations, reports the Chronicle.info with reference to RBC-Ukraine.
Over the past month, several states have declared their readiness to provide financial support to Ukraine. The US, Canada, the UK, the EU and other countries may soon allocate over $5 billion as loans and grants. This money will be used both to cover the state budget deficit and to strengthen the army.
The largest amount of support is expected from the UK, the EU and the US. And if earlier it took months to agree on the issue of funding, now decisions are made in a matter of days. The risks of Russian aggression have clearly accelerated Western partners in this matter.
About plans to allocate 1.2 billion macro-financial assistance to Ukraineeuro, the head of the European Commission Ursula von der Leyen announced on January 24, and already on February 1, the EC approved the loan. Now this decision must be approved by the Council of Europe and the European Parliament.
Macro-financial assistance is loans that the EU allocates at a small percentage to countries to support their balance of payments in a difficult economic situation, that is, to finance the country's budget expenditures. The new loan will be allocated as the sixth macro-financial assistance program since 2014. For the previous five, Ukraine was allocated 5.6 billion euros.
The first tranche of «macrofin» after completing all the bureaucratic procedures, they plan to transfer immediately. It will be issued without any conditions. Further funding will take place with the conditions that are currently being developed in the EC.
«We will be moving pretty fast. The first tranche without conditions. According to the second, we will see what requirements will be for the next tranches», — said the other day, EC Vice President Valdis Dombrovskis.
Russian aggression is the main risk factor
Back in August last Dombrovskis said that Ukraine does not need additional funding. But since then the situation has changed significantly. The main risk factor for Ukraine was a possible increase in Russian aggression.
It is because of this that the EU decided to increase the amount of funding. «Last Friday, I spoke with President Zelensky to assess the situation in Ukraine created by Russia's aggressive actions. We discussed how the EU could continue to support Ukraine both in the near and medium term»,» said von der Leyen, announcing the allocation of «macrofin».
In addition to the new program, the EU plans to increase the amount of grants, that is, non-refundable assistance — from 160 million to 280 million euros.
The United States is also preparing a decision on financial support for Ukraine. On January 27, Volodymyr Zelensky and Joe Biden spoke about this by phone. In what form the assistance will be provided and to what extent, it is still unknown exactly. According to RBC-Ukraine, these can be either guarantees from the United States to attract loans, or direct financial assistance.
The United States has used the instrument of financial guarantees for the issuance of Eurobonds by Ukraine several times since 2014. Guarantees were given for the placement of securities in the amount of $1 billion for a period of 5 years.
The UK will allocate about 2 billion pounds (about 2.7 billion dollars) for joint infrastructure and energy projects with Ukraine. This was confirmed following the visit of British Prime Minister Boris Johnson to Kiev.
According to Volodymyr Zelensky, Ukraine needs an additional $5 billion to restore the economy. «I don’t count on a smaller figure», the president said during a meeting with foreign journalists.
Why do we need money
Since the end of last year, after the first information about increased aggression from Russia, yields on Ukrainian Eurobonds have risen sharply, there has been an outflow of foreign investment and the hryvnia has fallen.
Finance Minister Serhiy Marchenko says that investors are reacting to the information environment they get panicky. But those investors who work with Ukraine for a long time and are constantly in contact with the government do not panic.
«Those who have invested funds for a short time, wanted to make money in Ukraine, and now they are selling, fearing a threat», are panicking, the minister said in an interview with EP.
And although there are the reserve is more than $1 billion, and a large payment on the external debt is due as early as September, additional money will not hurt now. After all, the government needs an average of $300 million every month just to pay off and service its external debt.
There is no particular reason for concern, both President Zelensky and Prime Minister Denys Shmyhal say. «NBU ensures the stability of the monetary unit in the corridor that is set … The exchange rate fluctuates, but it is stable despite all external, including informational influences and factors. The state fully fulfills its social obligations», the prime minister explained.
Volodymyr Zelenskyy noted that budget revenues in January were overfulfilled by UAH 7 billion, and the hryvnia exchange rate «feels better». «For almost a week, there has been a positive trend in the international financial markets regarding our bonds. Their quotes are returning to their previous level, so the financial world is optimistic about the future», Zelensky is sure.
Eurobond rates are indeed decreasing slightly, but this is happening quite slowly, said the head of the analytical department of IC Concorde Capital Oleksandr Parashchy.
And in the current environment, the rates on Eurobonds are still too high to count on new placements of securities by the government. The Ministry of Finance has practically nowhere to take money to finance the deficit, except from large creditors, the expert noted.
«This entire geopolitical situation should be resolved soon, then, perhaps, a window for placements will appear. We need to wait for the return of quotes on Eurobonds at least to the level of November 2021. If de-escalation does not happen (which is unlikely), then the government will have to rely solely on official lending», Parashchy told the publication.
At the moment, the market for external borrowings for Ukraine is de facto closed, agrees the analyst of «Alfa-Bank Ukraine» Alexey Blinov. And at the same time, the Ministry of Finance still needs to refinance a little more than $2 billion of external debt by the end of the year. Not to mention the need to finance the budget deficit.
«In 2021, it was external sources that dominated the financing of the budget deficit. They covered the 110.5 billion hryvnia deficit. The law on the state budget for 2022 assumes net funding from external sources for UAH 79 billion, but the actual figure may change significantly. Accordingly, attracting loans from the IMF, the EU and other official sources is highly relevant», Blinov noted.
Backup plan instead of market debt
Sergei Marchenko calls the new «macrofin» from the EU an important signal that Ukraine is back in the spotlight. «That is, we already have the prerequisites to replace external commercial financing with concessional financing from international partners», he noted. However, he acknowledged that it is still better to have access to foreign borrowing markets.
Access to foreign markets is better than official borrowing, confirms Alexander Parashchiy. «The uncertainty that remains will kill the economy — no one will invest in Ukraine, they will only withdraw money», he admits.
The mood of investors has already fully felt the domestic borrowing market. On Tuesday, February 1, the primary government bonds auction set a new anti-record for more than two years, said Taras Kotovich, senior financial analyst at ICU Group. During the auction, the Ministry of Finance was able to attract less than UAH 214 million to the state budget.
«Even in the first wave of the COVID-19 pandemic, the budget generally borrowed more funds. And smaller volumes of borrowing were back in January and October 2019», he noted.
On the other hand, according to the expert, in an unstable situation with a possible military escalation and market expectations of further rate hikes, it is quite normal that investors are in no hurry to provide the state with new loans on the old terms.
Non-residents get rid of hryvnia government bonds . Over the month, Oleksandr Parashchiy notes, their portfolio has decreased by more than 11 billion hryvnias. «This is a record. The last one was 8.6 billion hryvnias in March 2020 — at the peak of panic due to the coronacrisis», he explained.
Ukrainian banks buy securities from non-residents — it is more profitable for them than the primary auctions of the Ministry of Finance. Thus, the expert notes, it is obvious that local business sees the development of the situation in a completely different way than foreign business.
As for the IMF, the revision of the program is expected to take place in March. It is not yet planned to bring the timing of the allocation of the second tranche closer and increase its size. But given the situation and external risks for Ukraine, the lender may show loyalty in assessing the fulfillment of the conditions for continuing financing.
If this happens, then in early spring the second tranche under the stand-by program of 700 million dollars. And at the beginning of summer, the rest of the amount is about $1.5 billion.
Ukraine plans to prepare a new program with the IMF, as previously discussed in the Cabinet. Therefore, it makes no sense for the authorities to abuse the loyalty of the fund and delay the fulfillment of lending conditions. If the obligations under the current memorandum are not met on time, then with a high probability they will still become preconditions for the new program, which has happened before.