Reading the tea leaves of Ukrainian bond prices, a leading indicator of future economic health, does not inspire confidence. The FT reports on the sorry state of Ukraine’s economy:
The IMF initially assumed that the Ukrainian economy would contract 5 per cent last year, but even the subsequent revision to a 6.5 per cent recession now looks optimistic. Some economists estimate gross domestic product shrank 8 per cent last year, and the central bank governor has said output could have fallen as much as 10 per cent.
Add in the resulting budget slippage and a deeper devaluation of the currency than forecast and the FT’s interactive debt software indicates that Kiev’s debt-to-GDP ratio is likely to approach 90 per cent in 2015 — more than doubled from 2013 and at a level that the IMF often deems unsustainable.
The IMF estimates that Ukraine needs another $15bn to avert a default, but the fund, the US and the EU are wrangling over who will foot the bill. Time is running out because the IMF is not allowed to make the next disbursement from the existing programme unless it can say to a high degree of confidence that Kiev’s debts are sustainable.[…]
Unless Kiev’s western backers come up with more money soon, Ukraine could be forced to default, a prospect that has led the country’s creditors to dump their bonds. The $2.6 billion Ukrainian government bond maturing in 2017 sank to a record low of 58 cents on the dollar on Tuesday, equal to a yield of over 35 per cent.
Ukraine’s problems with Russia are just part of the enormous set of obstacles it faces going forward, the worst of which are primarily economic. If Russia’s strength relative to the West decides the course of the Ukrainian war, Putin is doomed. But, if the weakness of Ukraine is the decider, Putin has a much better chance of getting a deal that works for him. This news about the truly fragile state of Ukrainian finance will put smiles on the faces of at least some of the worried men in the Kremlin.