Interview with David Saha on economic consequences of the Corona crisis in Ukraine

Interview by Deutsche Welle, published on 18.03.2020 on

Ukraine loses access to international capital markets as a result of the Corona crisis

The Covid 19 pandemic has cut off Ukraine from the capital markets, says David Saha, an expert from the German Economic Team, in a conversation with DW. He advises to meet the IMF’s demands, which are painful for the oligarch Igor Kolomoisky. The German Economic Team in Berlin has been advising the Ukrainian government on economic reforms and macroeconomic stability for many years. In an interview with DW, expert David Saha shared his view on the risks for the Ukrainian economy due to the Covid 19 pandemic.

DW: As an expert advising the government of Ukraine, you are currently investigating, among other things, the possible effects of the Covid 19 pandemic on the Ukrainian economy. What are your initial conclusions?
David Saha: Of course the pandemic will have economic consequences. First, the Ukrainian government had to resort to restrictive measures. These include disruption of air and rail traffic and domestic restrictions on transport and trade. These measures have an impact on the economy. Furthermore, Ukraine is heavily dependent on international trade relations and capital movements. There will be an impact on Ukrainian exports and on access to foreign capital, both for companies and for the government.

DW: Before the beginning of the pandemic, the International Monetary Fund (IMF) predicted that the Ukrainian economy would grow by 3%. This forecast is probably outdated. How far will Ukraine move away from these forecasts?
David Saha: This depends primarily on how long the restrictive measures will last. If they don’t last long, demand will not be fully utilised during the year. But if long-term measures are necessary, there could be serious consequences for the global economy. This scenario is not unrealistic at present. In this case, Ukraine will be much more affected than many other countries.

DW: The strict quarantine measures in China lasted about two months before the virus was more or less under control. Will the Ukrainian economy be able to withstand the current tough measures for two months?
David Saha: More than two months will be extremely difficult. The longer it takes, the more difficult it will be. Everything depends on the equity reserves of the individual companies. In Ukraine companies have an average smaller “airbag” in financial terms, especially small companies will have a difficult time. Without supportive loans, it will therefore be difficult in most cases to hold out for two months.

DW: The German government has already committed loans to companies in the amount of several billion. However, the Ukrainian government does not have the same resources as Germany. How could companies be supported under these circumstances?
David Saha: For example, one could extend credit lines, one could resort to banking regulation, for example, by making loans available through the National Bank of Ukraine. The money must come from somewhere. This is very difficult, especially given the current uncertainty about continuing cooperation with the International Monetary Fund. The issues related to the IMF need to be resolved as soon as possible, as access to external debt is very difficult due to the pandemic.

DW: Will Ukraine manage the situation without the IMF?
David Saha: The current crisis dramatically increases the need for cooperation with the IMF, yet it existed even before the crisis. The favourable conditions under which the Ukrainian government had recently borrowed money on foreign markets were possible precisely because investors – against the background of the support from the IMF – could rely on Ukraine’s solvency. In a pandemic, capital markets have become more complex for transition countries. This is clearly illustrated by Ukrainian foreign currency bonds with maturities up to 2028, which until recently were yielding 6% per annum, but are currently at 12%. This rise is seen as a sign of increased risk. It is assumed that the country is de facto cut off from the international capital market with yield conditions of over 10% for bonds issued. This could be a major problem for Ukraine. The fact that Ukraine has initiated a reformatting of the government in connection with the Corona crisis, which is critically assessed by many external observers, is likely to have only increased the risks.

DW: This year Ukraine has to repay a high volume of foreign loans. And the conditions for repayment of the next tranche of the IMF loan have not yet been met. Can Ukraine get by without this money?
David Saha: An IMF loan is a precondition for the payment of loans to a number of other international institutions that have attached conditions to their cooperation with the IMF. In addition, private investors also follow the IMF. Without IMF loans, it will be extremely difficult or even impossible to service the national debt.

DW: The IMF’s key conditions for further lending to Ukraine are the lifting of the moratorium on the sale of agricultural land and the adoption of a law to prevent nationalized banks from returning to their former owners in order to protect deposits. Why is this law so important to the IMF?
David Saha: In the middle of the 2014-2015 banking crisis, a number of banks were nationalized. There are cases where the former owners of the banks are demanding their return through legal proceedings. In some of these cases, the reasons for the return of banks may even be violations of formalities in the nationalization process. In the case of the private bank, the largest nationalised financial institution, the state has spent USD 5.5 billion to recapitalise this de facto bankruptcy. This is a red line for the IMF. Banks should not be able to be returned to former owners who were responsible for their insolvency. The corresponding draft law provides that in the event of such a court decision, the state will recover the funds spent on capitalisation. The bank goes bankrupt and is nationalised again. This guarantees the stability of the banking system. The adoption of this law is not officially part of the IMF’s conditions. However, it is hard to imagine that the IMF would approve a regular loan without this law being passed.

DW: There are rumors that due to the pandemic, the IMF is accommodating and mitigating its conditions. Should the Ukrainian authorities rely on this?
David Saha: It is necessary to understand that without the IMF loan, Ukraine will lose the most. The IMF may be able to accommodate Ukraine in view of the current situation. This could relate in particular to the size of the loan programme, which was estimated at USD 5.5 billion before the crisis. It is hoped that the IMF will be open to grant a larger loan. I am convinced that no concessions should be made on the law on the nationalisation of banks.

DW: The former owner of the private bank, Igor Kolomoisky, seems to have a considerable influence on the current government, especially on the parliamentary faction “Servants of the People” and other groups in the Verkhovna Rada. Observers cite the recent vote to dismiss the Prosecutor General as an example. Kolomoisky does not hide his intention to reverse the nationalization of the private bank. Is this a threat to Ukraine’s financial stability on a par with the Corona virus?
David Saha: Without the law, there is no IMF loan. And without an IMF loan, Ukraine will find it extremely difficult to get through this year. So this view makes sense.”