Transcript of a Conference Call on Ukraine

August 4, 2015

Washington, D.C.
August 4, 2015

Nikolay Gueorguiev, Mission Chief for Ukraine
Bruno Silvestre, Communications Department

MR. SILVESTRE: Hi, everyone. My name is Bruno Silvestre from the Communications Department of the IMF. I’m glad to welcome you to this conference call on Ukraine’s first review under the extended arrangement.

And before I pass the floor to Nikolay Gueorguiev, the mission chief, I’d like to remind you of a few things.

First, the call is live and the embargo on the documents that you had received has been lifted. And there will be a digitized replay of the call available later today.

Now Nikolay, you have the floor.

MR. GUEORGUIEV: Thank you, Bruno. Hello, everybody. Let me begin with a brief overview of how we see the economic situation in Ukraine now and the implementation of the Fund’s program.

On the macroeconomic side, the economy is still fragile and we had to revise our growth projections down. But that said, we see tentative signs of macroeconomic stabilization. The balance of payments is in line with the program. The exchange rate stabilized. The national bank is accumulating reserves. The deposits in the banks are gradually increasing. The fiscal accounts are good. The budget deficit is overperforming relative to program targets. And finally, the economic decline seems to be moderating, although economic activity remains at a low level, as I said.

On the program implementation side, all performance criteria for March and June this year have been met. And the eight structural benchmarks were effectively completed, though some of them with delays and two had to be converted to prior actions. But nevertheless, these important policies under the program have been completed.

As you probably know, the discussions on the debt operation are progressing. The authorities and their creditors have engaged in intensive discussions in recent weeks. On this basis, we do expect debt operation to be completed in the near future.

I’ll limit my remarks to that and I’m ready to answer your questions now.

QUESTIONER: Unless I missed it I haven’t seen any mention of the 3 billion of debt that Ukraine has to repay to Russia by the end of the year. So does Ukraine have enough resources to meet these payments? And are you considering this debt as being held by the public sector?

And if I may, I have another question. According to the report, the public debt-to-GDP ratio would reach 94 percent each year after the debt operation is completed. What is your estimate of this ratio if the debt operation failed?

MR. GUEORGUIEV: First, Ukraine at the moment remains current on all its debt, the coupon on the Russian bonds and all other coupons on Ukraine debt have been paid. There is a lot of time between now and December. We do expect further discussions on Ukraine’s debt, including the one with Russia.

Public debt level actually depends a little bit on the design of the debt operation. So this 94 percent relative to GDP is an estimate. But generally speaking, it will be a couple of percentage points higher without the debt operation being completed.

QUESTIONER: If I just can follow up on the issue of the Russian debt. You haven’t answered my question. Are you considering this debt as being held by the public sector? Does it mean that if Ukraine doesn’t repay, the IMF wouldn’t be able to keep on lending money to the country?

MR. GUEORGUIEV: The IMF Executive Board is the one who can determine the status of this debt. And the IMF Board hasn’t discussed the matter yet. There’s no need for them to discuss it since Ukraine is not in arrears.

QUESTIONER: I have my own questions, but I just wanted to follow up on that. I believe the IMF counsel has made a recommendation on the status of that debt as sovereign, not private; correct me if I’m wrong.

Secondly, even though the Board may make the final decision, the counsel makes the recommendation.

MR. GUEORGUIEV: The IMF counsel, you said?

MR. TALLEY: Yes, Sean Hagan.

MR. GUEORGUIEV: I’m not aware of this. You have to ask Mr. Hagan about this.

QUESTIONER: So you’re not aware of Mr. Hagan’s view on this debt?

MR. GUEORGUIEV: I am not going to comment on the views of others on this.

QUESTIONER: I’m going to acknowledge you’re not going to say anything, but I will point out that I’m not asking for the counsel of others. I’m asking for the IMF’s legal counsel’s view on it.

But that being said, you say that you assume a haircut on the debt of 40 percent for the bonds that you say are eligible for the debt operation. What amount of haircut are you assuming?

MR. GUEORGUIEV: As you know, the operation has three objectives: to secure 15.3 billion in program finances by the end of 2018, to reach a debt-to-GDP ratio of below 71 percent by 2020, and to limit the government’s financing needs to 10 percent of GDP on average in 2019 to 2025, no more than 12 percent in any single year.

There is a number of parameters that can deliver these outcomes. And it’s up to authorities and their advisors to discuss with the creditors -- discuss and agree on a specific design.

QUESTIONER: Well, so if there are a number of parameters then why have you assumed a haircut, because you could just as well do a debt maturity extension?

MR. GUEORGUIEV: Nowhere in the report do we say that we have made any specific assumptions. It’s not for us to say.

QUESTIONER: Actually, that’s not true. In the debt sustainability analysis (DSA) you say that you are assuming an expectation of a principal haircut.

MR. GUEORGUIEV: All I can say is that there are many parameters that achieve these objectives and it’s not for us to be specific on these parameters. It’s between the authorities, their advisors, and the creditors.

QUESTIONER: Finally, you mentioned a number of risks that could derail the program, including war-induced shocks, a weak export growth, and a growth shock. What would be the consequence of those risks materializing? Are we talking about a need for a new debt restructuring?

MR. GUEORGUIEV: These risks are quantified in the various stress tests that are described in the DSA. As of now, these remain risks. In other words, they are not part of the baseline. We have to see what specific combinations of risks materialize, if any do, in order to be able to say what implications would that incur.

QUESTIONER: But would it make debt unsustainable under your projections?

MR. GUEORGUIEV: As you know, the DSA describes that our assessment now is that when the operation is complete, the debt will be sustainable with high probability. High probability, it doesn’t mean certainty, but it means sufficiently high probability to be confident to go ahead.

So under most scenarios you can see this in the DSA analysis, under the shocks that are described there, debt does remain sustainable after the initial increase.

QUESTIONER: Under most of them. Great, thank you. Appreciate it.

QUESTIONER: I have three brief questions. When might the next IMF mission visit Kiev? How large would the next tranche of debt be? And what targets Ukraine will need to meet to get the next tranche?

MR. GUEORGUIEV: On the next mission, we’re discussing now when exactly will it be, but it will be at a time that keeps the program on track. And the policies that will be discussed then are, in fact, included in the memorandum of economic and financial policies. You can see the forward-looking commitments there in all policies: fiscal, anti-corruption, monetary, et cetera.

On the next tranche, this is actually described in table 8 of the staff report. So the next tranche will be the same size as this one, about 1.7 billion U.S. dollars.

QUESTIONER: I’m wondering, the reports that you put out said that there are exceptionally high risks to Ukraine’s ability to restore its financial stability in light of the separatist conflict and also other questions. Why, at the same time, are there exceptionally high risks and also a high probability that Ukraine will be able to repay its debts?

And has the Fund reconsidered the way it assesses these risks in light of the way in which Greece exceeded projections, sort of you’re so often overly optimistic compared to what actually turned out to be true, and Ukraine is arguably in a much more volatile situation?

And then my other question goes back to this idea of debt re-profiling. Has the IMF taken a more forthright approach in calling for debt restructuring or debt relief whether it's a haircut or extending maturities, in light of what occurred during the Greece negotiations? We are so often overly optimistic compared to what actually turned out to be true, and Ukraine is arguably a much more volatile situation

MR. GUEORGUIEV: On risks, there is nothing new in our assessment now. The same risks that were in place a year ago remain in place, and some of them are difficult to mitigate, like the possible acceleration of the conflict. But it's a risk; it doesn’t mean that the IMF cannot support Ukraine. Program implementation is on track, the program is fully financed, and debt remains sustainable with high probability.

The IMF can support Ukraine, and does support Ukraine. Let me repeat that we see the program working, and the policies that the government is implementing are bringing back the first signs of macroeconomic stabilization. All performance criteria have been met, and the national central bank is accumulating reserves. This is a key difference from the last year.

A few months into this program, the program is working as expected and bringing the expected results. This gives us a lot of hope, and not only hope, but expectation that things will continue to improve as planned.

QUESTIONER: And regarding the threats by the Ukrainian Finance Minister, that if there would not be greater debt restructuring, they would withhold the next payment: Would the IMF consider them in arrears, would they treat them the same way they have been treating other countries?

MR. GUEORGUIEV: As we say in the report, we are in favor of a collaborative solution between Ukraine and their creditors.

That said, should the debt discussions fail -- and we have said this several times so far -- should Ukraine decide to impose a moratorium on debt payments, the IMF has a policy of lending into arrears. The IMF can continue to support Ukraine provided the conditions of this policy are met.

QUESTIONER: A question on the capital controls, there is a reference to a roadmap on the gradual lifting of those controls. Can you comment on which measures will be lifted first and when, and are you saying that all capital controls must be removed by next April?

MR. GUEORGUIEV: There is a roadmap; I believe the national bank has mentioned in their public communication some of its basic elements. And they did actually relax some restrictions already on June 3, so this was the first stage of the implementation of this roadmap. The roadmap is generally conditions-based, and I won't go into details here, but these conditions are related to further progress in macroeconomic stabilization in Ukraine, and as stabilization becomes firmly entrenched, more and more restrictions will be lifted.

Eventually, and under the successful implementation of the program, all restrictions will be lifted, but since this plan is conditions-based, rather than time-bound, I cannot say exactly when it will happen in time; full liberalization will come when the macroeconomic stabilization is firmly in place, when there are no more risks for stability or growth.

QUESTIONER: I just want to make sure I understood the answer to the question about how you can say that the debt is sustainable under high probability when you say that risks will remain exceptionally high. If I understood you correctly, you are saying that because those uncertainties are largely geopolitical about how the conflict will progress, that is why you are basically assuming there is no escalation in the high probability determination. Am I correct in understanding that?

MR. GUEORGUIEV: Broadly speaking, these risks are quantified in the stress tests that are in the debt sustainability analysis, and as I said, in fact all the stress tests that are described there lead to sustainable debt in the medium and long term. The baseline of the program is based on non-intensification of the conflict.

Now, non-intensification means exactly that. It doesn’t mean complete ceasefire, but it means that the situation remains as it is now. It doesn’t exclude the occasional flare up. But in sum these risks have either moderate impact or relative low probability. This is how the high probability of debt sustainability works.

QUESTIONER: So when you are talking about exceptionally high risks, you are not necessarily referring to the debt sustainability? Then what are you referring to? What is the exceptionally high risk happening?

MR. GUEORGUIEV: In fact all these risks are quantified in the stress tests in the debt sustainability analysis. The macroeconomic impact, in other words, is quantified. How does this work? If they materialize, they either lower growth or lead to exchange rate depreciation or to higher fiscal spending.

So, you can see the various stress tests scenarios in the debt sustainability analysis. They have this combination of factors. So risks are taken into account in the assessment of debt sustainability in these ways.

QUESTIONER: And under all those DSA scenarios, the debt is still sustainable because of the debt operation assumptions?


QUESTIONER: And then finally, you said that there has been no change, risks have been exceptional since the previous program. If that’s the case then why didn’t the IMF require debt restructuring as many outside the Fund suggested would be necessary in the first program?

MR. GUEORGUIEV: At the inception of the first program, the baseline was different and risks did not call for a debt operation. Then, as we all know, in August-September last year, and in January-February this year, a materialization of one of these risks happened, namely, the conflict did intensify, and this led to a lack of confidence in macroeconomic stabilization, exchange rate depreciation, and other unfavorable developments that made debt unsustainable, and required the debt operation.

QUESTIONER: Under your “12 months, fully financed and debt sustainability requirements” guidelines under the IMF Articles, shouldn’t the determination on the Russian bond have already been made by the Board, instead waiting until the last minute?

MR. GUEORGUIEV: Not necessarily. As I said, there is no need now, because Ukraine is not in arrears, and there is plenty of time until December. But more importantly there are a number of parametric combinations that lead to satisfaction of the full financial assurances under the program.

QUESTIONER: Are you saying that one of those parameters is not including the Russian debt in the debt operation?

MR. GUEORGUIEV: As I said in one of my previous answers, we don't have specific assumptions about any of the design of the operations…

QUESTIONER: Please forgive me for interrupting, but the IMF is making very clear assumptions about Greece's debt and its inability to pay back sovereign bonds, and here is a clear case where the bondholder may be a sovereign holder and that would rule out its inclusion in a debt operation. You are either saying that that determination does not need to be made because it doesn’t need to be included, there are other ways of securing the debt operation needs without including it. Or you are saying something else? And I'm not sure what that else is.

MR. GUEORGUIEV: I'm saying that there are many ways to meet the financing assurances under the program. I cannot speak about Greece, you have to talk to the colleagues who deal with the Greek program. But in Ukraine’s case, this is where we are. There is time, Ukraine is not in arrears to anybody now, and the financial assurances can be met in a number of ways.

QUESTIONER: I'm sorry to be a real pain on this, but I'm not sure. When you communicate there are a number of ways that can be met, in response to my question about the 3 billion in Russian debt, I do not understand what you are trying to say. Are you trying to say that that does not have to be included to secure the 15 billion in debt restructuring? Or are you not saying that?

MR. GUEORGUIEV: I'm saying what I said. There is a number of ways to reach the program objectives.

QUESTIONER: So you prefer to keep me in ignorance about what you actually mean, rather than tell me what you actually mean? I'm sorry to be a pain, but I hope you can understand that I don't understand what you are saying. I mean, there are multiple ways of reading it, and you are being specifically vague here.

I could read it that the Ukraine could not make that payment and the IMF could tweak its rules like it did the exceptional criteria, in a way to not see it as lending into a sovereign in debt arrears. Or, it could mean that it's not needed to be to secure its debt profile. I'm asking you for clarity on your answer.

MR. GUEORGUIEV: The program has objectives, these objectives have been specified already in March, and we believe these objectives will be met when the operation is completed. Beyond this, the specific design of the instrument and the operation is between the authorities and their creditors.

QUESTIONER: Just to be clear, you are choosing not to answer my question?

MR. GUEORGUIEV: I have answered your question to the best of our…

QUESTIONER: The best of your ability at this point. All right, great. Thank you.

MR. SILVESTRE: Thank you very much for your time and for participating in this conference call. This will now conclude the call.


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