JPMorgan Chase Bank N.

A, London Branch
Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com

Economic Research
January 5, 2015

Economic Research Note

Public sector FX-debt repayments ($bn)

No Ukraine debt restructuring

depends on donor generosity
We estimate Ukraines public sector USD financing
needs over the next two years at $41bn (43% of 2015
GDP); in excess of planned funding, we estimate an
additional $12.4bn in 2015 and $10.8bn in 2016 is
needed
These estimates assume that the government will have
to pay the gas bill and increase FX reserves to at least
$15bn
We expect a re-designed, extended IMF program in
2015; we believe avoidance of sovereign debt
restructuring will depend on donors generosity
We believe that Ukraine needs a completely re-designed IMF
program in 2015 as we estimate a funding gap of $41bn over
the next two years, while committed official financing
amounts to $18bn. Given that Ukraine appears to need an
additional $23.2bn in public-sector funding for 2015-2016
($12.4bn in 2015 and $10.8bn in 2016), consideration of
private sector involvement (PSI) in a new program is
expected. It is possible that only re-profiling of private-sector
external debt may be considered initially (i.e., a soft version
of PSI), but it is unlikely to offer enough debt relief for
Ukraine to regain access to external markets two to three
years down the road, which suggest that harder PSI that
includes principal haircuts may be needed eventually.
Ukrainian PM Yatseniuk said in mid-December that the
country needs at least $15bn in new aid in order to survive,
in order to prevent a default. He also stated that Ukraine
needs a donor conference and a recovery plan and help of
Western partners. Meanwhile, according to Bloomberg,
Moodys said that there is a high likelihood of a Ukrainian
bond restructuring in 2015. According to the credit rating
agency, the risk of default is rising as the government faces
roughly $28bn in external debt maturities next year, with new
credit from the IMF, EU and other official lenders likely to be
insufficient to cover these payments. Therefore, Moodys
estimates imply that Ukraine will need to borrow at least
another $15-20bn beyond what is provided by existing
programs over the next 12 months.
In our view, PSI is likely to be considered this year for at least
three reasons. First, end-2014 gross FX reserves likely fell to
about $7bn according to our calculations in the next section.
Such a low level of FX reserves is often associated with a loss
of confidence in the currency, which would harm investment
and growth. Therefore, the level of FX reserves would have to
increase markedly, putting pressure on local and international

Dec-14E
0.1
0.0
0.4
0.2
0.0
0.0
0.4
0.7
0.3
2.4
3.4

Eurobonds plus interest

Guaranteed FX bonds (plus interest)
Local FX bonds plus interest
IMF
WB/EBRD/EIB/Russia/others*
WB/EBRD/EIB/others interest**
Total external
Total in FX (with local FX bonds)
Estimated gas from the EU
Russian gas, disputed/estimated
Total estimated FX payments

2015E
5.4
0.2
2.2
1.5
0.6
0.4
8.0
10.2
3.4
6.7
20.3

2016E
3.2
0.2
1.6
0.0
0.6
0.4
4.3
5.9
3.7
3.2
12.8

*Finance Ministry estimates for $11.4bn of FX debt (as of end-Nov 2014) to a range of creditors
(IBRD with $4.3bn and China export-import bank with $1.5bn are the largest);
**WB/EBRD/others are estimated interest payments; we assume Naftogaz can only buy FX for
gas from the NBU over next two years
Source: Finance Ministry, Bloomberg, J.P. Morgan forecasts

Public debt structure in Ukraine

Domestic debt
Domestic guaranteed debt
External debt
External guaranteed debt

Total debt
Out of which in UAH:
UAH bonds
Guaranteed UAH bonds
Others
Out of which in FX
Eurobonds
o/w Russia

Guaranteed Eurobonds
Local FX bonds
FX loans
o/w WB
o/w EBRD/EIB
o/w EU
o/w Russia

Guaranteed FX loans
o/w IFI
o/w China Eximbank
o/w other commercial

IMF
USD/UAH, eop

End Jan-14
in $bn
32.2
3.6
27.8
9.5

in $bn
27.7
1.9
31.7
8.1

End Nov-14
in UAHbn % of GDP
414.1
27.3
28.7
1.9
474.5
31.3
120.6
8.0

73.2

69.3

1037.9

68.5

30.0
25.9
3.5
0.7
43.2
17.4
3.0
3.4
5.8
5.1
3.0
1.1
0.0

25.1
23.0
1.9
0.2
44.3
17.3
3.0
1.8
4.5
7.5
4.3
1.1
1.1

375.4
343.9
28.7
2.8
662.5
259.0
44.9
27.1
67.4
111.8
64.2
15.8
16.1

24.8
22.7
1.9
0.2
43.8
17.1
3.0
1.8
4.4
7.4
4.2
1.0
1.1

0.7

0.6

9.1

0.6

4.5
0.3
1.5
2.6

4.0
0.7
1.5
1.8

59.6
10.6
22.5
26.6

7.1

9.2

137.7

3.9
0.7
1.5
1.8
9.1

8.16

14.97

Source: Finance Ministry, official FX rate used for calculations as % of GDP and UAH12/USD is
the average for 2014; NBU held about UAH284bn of bonds on its balance sheet at end Nov-14.

policymakers to consider PSI among the alternative strategies.

Indeed, in late December, the Governor of the National Bank
of Ukraine (NBU) stated that Ukraine aims to boost FX
reserves to $15-23bn and our calculations for the funding gap
are based on the assumption that it aims to achieve at least
$15bn in FX reserves, with higher target levels requiring more
public sector funding. Second, a decision to increase official
1

JPMorgan Chase Bank N.A, London Branch

Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com

Economic Research
No Ukraine debt restructuring
depends on donor generosity
January 5, 2015

funding in the hope of avoiding PSI could backfire if

investors perceive that a hard PSI at some time will be
inevitable. Thus, the official sector may recognize the need
for early PSI since it might provide Ukraine with a better
starting point and boost the credibility of the program. Third,
it is not clear that the donors are willing to commit massive
new amounts without PSI as they would end up paying the
private sector and being the largest holders of Ukrainian debt.

Larger than expected funding needs

Explaining the FX reserve drawdown

Three reasons largely explain the greater-than-anticipated
decline in Ukraines FX reserves to our forecast of $7.1bn by
end-2014 relative to $16.2bn forecasted by the IMF in
September: (i) payments for gas imports from Europe and
Russia, including $3.1bn unpaid gas debt to Russia; (ii) NBU
FX interventions, especially during September and October;
and (iii) postponement of the IMF third and fourth
disbursements totaling $2.8bn. Ukraines gross FX reserves
fell in November to $10bn from $12.6bn in October, covering
only 1 months of imports. The forecast of $7.1bn implies
that end-2014 FX reserves would cover 1.2 months of
imports, a level last seen in early 2004 that is similar to the
one recorded during the previous restructuring of Ukrainian
debt in 1998-2000. We estimate that total payments from FX
reserves during December reached $3.4bn (table previous
page) and FX interventions over the month at about $150mn.
Since Ukraine received another EUR0.5bn ($620mn) tranche
in EU funding, the drop in FX reserves in December likely
reached about $2.9bn.
At the start of Ukraines IMF program last April, the IMF
projected Ukraines end-2014 FX reserves at $19.2bn and the
end-2015 figure at $26.7bn. After the first review in
September, the Fund downgraded these forecasts to $16.2bn
for end-2014 and $23.4bn for end-2015, and introduced a
$29.3bn projection for end-2016. Thus, it appears the IMF
failed to anticipate the sharp 2014 drop in FX reserves and
continues to optimistically expect a recovery toward $29bn,
which would imply an even larger $55.3bn funding gap
($20.3bn from payments in 2015, plus $12.8bn from
payments in 2016, plus the end-2016 forecast for FX reserves
stock of $29.3bn, minus the $7.1bn end-2014 stock (table on
the previous page and next section). We believe the IMF will
accept a lower level of FX reserves (likely around $15bn at
end-2016) and thus we estimate a financing gap of about
$41bn over 2015-2016 (of about 43% of 2015 GDP). This
figure far exceeds the $33bn gap estimate discussed by some
EU officials ($18bn of funding already committed and
additional needs of $15bn).

As mentioned at the outset, we estimate the public sectors

financing needs over the next two years at about $41bn. The
private sector gap adds upside risks to this estimate, but we
choose to discount it by making relatively optimistic
assumptions about rollover rates in the private sector. Relative
to the $41bn funding gap, committed resources at this
moment are $11.8bn from the IMF and $6bn from the EU and
others, although some of this $6bn is not directed to the public
sector. Therefore, we estimate the uncovered funding gap at
no less than $23.2bn (24% of 2015 GDP) over the next two
years: $12.4bn in 2015 and $10.8bn in 2016.
For 2015, we estimate payments on external and locally
issued USD debt that will have to be made from FX reserves
at $10.2bn (table on previous page). We also estimate that the
Ukrainian economy will need 25bcm in gas imports in 2015
(worth about $8.7bnscenario analysis below) and will have
to pay $1.4bn to Russia for gas imported during late 2013 and
in 2Q14 as a result of the likely arbitration decision in
Stockholm later this year. Thus, we estimate the drawdown of
NBU FX reserves in 2015 at $20.3bn (21% of 2015 GDP),
excluding FX intervention to limit UAH depreciation.
Correspondingly, we calculate that $28.3bn (about 29% of
forecasted GDP) in official support will be needed in 2015 vs.
$10.8bn in scheduled IMF disbursements and $5bn from the
EU/WB/ EBRD/EIB.
Ukraines public sector financing needs are likely to remain
large in 2016 as well. Our implicit assumption is that the
public sector will continue to be locked out of financing in
external markets in 2016 and that Naftogaz will continue to
buy USD from the NBU in order to pay for gas imports.
Further, we estimate 20bcm in gas imports next year and
estimate the drawdown on FX reserves at $12.8bn (13% of
2016 GDP) reflecting $5.9bn in payments on external debt or
local USD debt and $6.9bn in gas payments in 2016 (table on
first page). By implication, Ukraine will need about $12.8bn
in financing from official creditors just to maintain an
unchanged level of FX reserves. The IMF has scheduled only
$1bn in disbursements for 2016. In conclusion, assuming the
IMF targets $15bn in FX reserves at the central bank by the
end of 2016, we estimate the total financing needs over the
next two years would amount to close to $41bn. Instead, if the
IMF targets FX reserves of $29.3bn at end-2016 (in line with
the September 2014 IMF forecast), then the financing gap
would be $55.3bn (57% of 2015 GDP).

PSI unavoidable without donor generosity

In our view, the IMF cannot easily increases resources
dedicated to Ukraine. The countrys total debt to the IMF was
$9.2bn at the end-November 2014, with $6bn of debt linked

JPMorgan Chase Bank N.A, London Branch

Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com

to current or previous programs and likely will rise to about

$16.2bn or more than 17% of GDP under the program.
Assuming the IMF increases its financing by an additional $510bn to cover the larger funding gap identified above, its
exposure to Ukraine in 2016 could reach $21.2-26.2bn or
more than 22-28% of GDP and 10.5 to 13 times Ukraines
IMF quota. This figure compares to the IMFs peak exposure
to Greece that stood at about 17% of GDP or 23.9 times the
quota in 2013. This large exposure would suggest that the
IMFs appetite to significantly increase financing may be
limited.
Given that Ukraine faces a severe liquidity problem against a
backdrop of low FX reserves and large external public and
private sector repayments, PSI may well be needed. Given the
larger financing gap discussed before, a debt restructuring
with extension of maturities and/or haircuts of principal would
enhance the credibility of the program. If demand pressure
from the private sector experiencing difficulties in rolling over
its foreign currency debt compels the NBU to sell USD to
stabilize the FX market, then Ukraine would likely need more
than $28.3bn of official support in 2015. The low level of FX
reserves further complicates the situation as confidence in the
currency is declining and severely limits NBU capabilities to
stabilize the UAH even with significant sales of USD.
Moreover, private sector needs come on top of the public
sector needs. For example, based on IMF reports, rollover
rates in the banking sector were above 100% in 2012 and
2013, but declined to about 50% in 2Q14. In the corporate
sector, rollover rates were about 75% in 1Q14, but increased
to about 100% in 2Q14 while in previous years they were
close to 150%. Rollover rates likely fell sharply in 2H14 as
the crisis in the Donbas region escalated, making it hard to
expect rollover rates above 100% as long as the conflict
persists. The IMF program assumes an 88% rollover rate in
2014 and 108% in 2015, while we view 75%-80% for both
years as a more realistic assumption. Ukraines FX reserves
currently cover only 15% of the stock of external debt
maturing over the next 12 months (chart on right), sharply
lower than the 80% peak recorded in late 2007, indicating
significant pressure on the corporate sectors ability to repay
external debt.
We see at least two main benefits of hard PSI: (i) reduction of
the large financing needs of the Ukrainian economy and, to
some extent, of the debt to GDP profile, and (ii) improved
confidence in Ukraines financing situation, which would
eventually allow both corporates and the sovereign to borrow
externally and roll over external debt. However, we think a
strong recovery in FDI inflows would require an end to the
fighting in the eastern region. The main counter-arguments to
restructuring are: (i) geopolitical sensitivities about prompting

Economic Research
January 5, 2015

FX reserves vs. short-term debt

US$mn
65000

FX reserves as % of debt maturing

over next 12 months

85
75
65
55
45
35
25
15

58000
51000
44000
37000
30000
2007

Debt maturing over next 12 months (lhs)

2008

2009

2010

2011

2012

2013

2014

2015

Source: NBU

Ukraine to restructure its debt given the crisis with Russia,

and (ii) the low share of Eurobonds in external debt, which
suggests that restructuring would not achieve much in terms
of lowering the overall debt-to-GDP ratio. In fact, Eurobonds
account for $19.1bn or about 28% of $69.3bn in public debt at
the end of November 2014; this is about 22.1% of projected
GDP for 2015.

Timeline of events and a new IMF program

We expect the IMF to design a new two-year program for
Ukraine once its January negotiation mission returns from
Kyiv. Debt restructuring will likely to be considered in 2015
or 2016, including the option of a large haircut on the external
sovereign debt that could improve the programs credibility
and would allow Ukraine to regain access to external markets
in order to reduce its dependence on the official sector.
Besides a haircut on Eurobonds, a conversion of local USD
bonds into local currency bonds would also help to reduce
pressure on FX reserves. However, it is possible that the IMF
may decide that a maturity extension is enough as it would
address the liquidity problem faced by Ukraine. In such a
scenario, we believe that Ukraine would remain locked out of
capital markets over the medium term, the share of official
sector in public debt would increase, and deeper haircuts
would still be needed in 2016 or 2017 but would offer less
relief than haircuts in 2015 as a smaller part of debt would be
liable for restructuring at that time.
We expect disbursements from the IMF in February/March
2015, while the EU and others are likely to pay out smaller
amounts during 1Q15 (mostly after IMF board decision). We
expect the IMF mission scheduled to arrive in Kyiv on
January 8, 2015 to move expeditiously on discussions with
the new government formed in early December. Preparation
of materials for the IMF board is to follow and a board
decision will likely be made in February/March. In order to
disburse, the IMF board needs to approve the review, but will
do so only after the financing gap estimated by the IMFs
latest missions is fully covered. This would require
agreements among different official creditorsthe IMF, the
European Union (EU), World Bank (WB), the European Bank
3

JPMorgan Chase Bank N.A, London Branch

Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com

for Reconstruction and Development (EBRD), the European

Investment Bank (EIB) and others. Thus, the next IMF
disbursement is likely to come in February/March 2015 at the
earliest. EU officials talked about limits on the amount of
financing the EU budget could offer and asked support of EU
states for an additional EUR2bn; these disbursements would
come after the IMF Board meeting as well. The date for the
international donors conference has not been set yet, but we
think it will take place ahead of the IMF board decision.

Economic Research
No Ukraine debt restructuring
depends on donor generosity
January 5, 2015

Total gas consumption remains elevated in Ukraine (bcm)

75
70
65
60
55
50
45
40

76.4

Scenario analysis on gas imports

Given the fall in oil prices and its impact on gas prices, the
financing needs of the Ukrainian public sector may fall short
of our projections if gas imports or the price of imported gas
are below our forecasts. For example, in a scenario in which
Ukraine imports only 15bcm of gas in both 2015 and 2016
and the average price of gas during that period is $300/tcm,
the financing needs of the public sector would be $24bn in
2015 and $10.4bn in 2016 for a total of $34.4bn over the next
two years (with FX reserves at about $15bn). Most
optimistically, assuming there is no need to cover gas
payments, but that the desired level of FX reserves is $15bn,
the financing needs of the public sector would be around
$24.5bn over the next two years.
We expect significant gas imports over the next two years that
will have to be covered by the NBU as Naftogaz has no
access to US$ financing. We think that gas imports will rise to
25bcm in 2015 because Ukraine reduced imports substantially
in 2014 and also consumed gas reserves; thus it is likely that
about 5bcm of gas will be needed to replenish reserves in
2015. We forecast total gas consumption in 2015 at 42bcm,
with 20bcm imported and 22bcm domestically produced. We
think gas imports will be large in 2016 as well, at about
20bcm, projecting somewhat higher gas consumption than in
2015 because we expect an economic recovery. Gas
consumption over the past 10 years usually exceeded 50bcm
per year; 2014 probably was the first year with lower
consumption at about 48bcm.
While in the table on the first page we present gas imports
from Russia separately from imports from EU countries
(mainly re-exported Russian gas), the price difference is not
large, with the average cost of gas from Europe in December
4

66.3

69.9

57.7

06

07

08

Source: National sources

09

JPM
estimate/
forecast

59.3
54.8

51.9

05

Two recent IMF missions to Ukraine assessed the situation

ahead of the IMF disbursing its third tranche, initially
scheduled for September 2014. Missions took place in the
second half of November and on December 9-18; both were
delayed by snap parliamentary elections. The third tranche is
worth $2.8bn and Ukrainian officials statements suggest that
the fourth tranche ($2bn) scheduled for March 2015 may be
disbursed concurrently with the third one.

73.9

48.1

50.4

10

11

12

13

44

42
14

15

16

Key economic forecasts

Real GDP, %oya
Real GDP, %oya (ex Crimea/Sevastopol)
Nominal GDP, $bn
Nominal GDP, $bn (ex Crimea/Sevastopol)
CPI, %oya
Overall budget, % of GDP (with Naftogaz)
Naftogaz deficit, % of GDP
C/A balance, % of GDP
Trade balance, % of GDP
Exports of goods, $bn
Imports of goods, $bn
Inward FDI, $ billion
Gross FX reserves, $bn, gold included
Public sector debt, % of GDP
Total external debt, % of GDP
Debt maturing over next 12 months, $bn
UAH/USD, avg
UAH/USD, eop

2013
0.0
0.2
188.4
181.3
0.5
-6.7
-1.9
-9.1
-11.0
65.0
85.0
4.5
20.4
38.8
78.4
61.7
8.0
8.2

2014E

2015F

2016F

-7.0

-5.9

3.0

126.5
23.8
-10.5
-6.4
-3.8
-2.1
58.5
61.2
0.1
7.1
72.6
106.7
54.0
12.0
15.8

95.2
17.2
-12.0
-4.0
-2.5
-1.3
54.4
55.7
0.5
5.1
102.5
144.3
46.4
17.2
19.0

95.4
11.4
-5.0
-1.5
0.1
0.4
54.9
54.6
0.5
NA
104.9
136.8
40.9
19.6
21.0

Source: NBU, UkrStat, MinFin, JP Morgan forecasts/estimates

Financing needs in 2015 for assumptions around gas imports

Gas imports (bcm)

Price of gas ($/tcm)

200
250
300
350
400
450

15

20

25

30

35

22.5
23.3
24.0
24.8
25.5
26.3

23.5
24.5
25.5
26.5
27.5
28.5

24.5
25.8
27.0
28.3
29.5
30.8

25.5
27.0
28.5
30.0
31.5
33.0

26.5
28.3
30.0
31.8
33.5
35.3

Source: JP Morgan; marked is baseline

2014 at about US$350/tcm vs. US$378/tcm for imports from

Russia, and over the next two years we expect the difference
to be even smaller. For 2015 and we assumed that the price of
Russian gas will average US$355/tcm and the price of gas
from the EU will average US$340/tcm. Therefore, the amount
of US$ needed to pay for gas would not be very different if
more gas was imported from the EU rather than Russia.

JPMorgan Chase Bank N.A, London Branch

Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com

Economic Research
January 5, 2015

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JPMorgan Chase Bank N.A, London Branch

Nicolaie Alexandru-Chidesciuc (44 20) 7742-2466
nicolaie.alexandru@jpmorgan.com

Economic Research
No Ukraine debt restructuring
depends on donor generosity
January 5, 2015

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