OREANDA-NEWS  On 07 November was announced, that the IMF staff mission and Ukrainian authorities reached an agreement on economic program supported by an USD 16.5bln loan under a 24 month stand-by arrangement. The agreement is now subject to approval by IMF Management and Executive Board conditioned on the approval of legislative changes to Ukraine’s bank resolution program.

The complete set of conditions for the IMF program has not been disclosed yet, but reportedly it includes several points in a number of areas such as exchange rate policy (namely greater exchange rate flexibility, a changes in methodology of official exchange rate calculation), fiscal policy (deficit-free budget for the next year, the freeze in real terms of budget wages and other social expenditures, the increase in retail gas tariffs to economically justified levels), banking supervision (an increase in maximal deposit insurance coverage from UAH 50 000 (EUR 7000) to UAH 100 000 (EUR 14000) and a fast and smooth resolution of Prominvestbank case).

According to Dimitry Sologoub, the Head of Research Department of Raiffeisen Bank Aval, the reaching of agreement with IMF as a step in the right direction as there are several positive factors of the IMF program.

- First, it may help to partially restore the market confidence in Ukraine, that eroded recently due to the unstable politics, large external exposures and near-failure of Prominvestbank. Specifically, the success of authorities to secure IMF loan in such short time period sends a signal to the market on the determination of Ukrainian officials to tackle the crisis. In this respect, the timely and smooth approval of necessary legislative changes by the Parliament is crucial.

- Second, the loan volume looks large enough to cover expected external financing gap. We estimate external financing requirements (short term debt, maturing long term liabilities and expected C/A deficit net of corporate short-term trade finance and parent funding of foreign owned banks) at USD 35-40 bn over the next 4 quarters. The foreign exchange reserves were at a level of USD 34.6 bn on 22 October.

- Third, given the lack of consensus between main political players the IMF program might be an effective instrument to push through necessary anti-crisis measures.

- Finally, the IMF agreement may give a green light to other international lenders, such as WB and EBRD, which reportedly consider the option of new loans for Ukraine, first of all in the field of infrastructure.

Nevertheless, there are two main risks in the current situation:

- First is the failure of politicians to agree on proposed legislative changes that may halt the implementation of IMF program. This risk is quite high as main political players apparently underestimate the scale of the economic problems and primarily focus on forthcoming parliamentary and presidential elections.

- Second, if Ukraine’s external conditions deteriorate further the IMF loan might not be enough to stabilize the economy.