Ukrainian Debt Sustainability Challenge Remain Heigheted As New IMF Programs Talks Accelerate

Source: National Bank of Ukraine, IMF, World Bank and Scope Forecasts Finance Questions Are Pressing As IMF Programs Concludes in March 2027 If the War Continues Into Next Year – AS Appears Inevitable – Decisions Must Be Made AROUND The FINANCING OF UKRAINE ADITER an existing IMF Program Four-Year Programme from the Fund. Military Spending Absorbs 60% of the Total Budget, Leaving Kyiv Heavly Reliant on Foreign and Official-Sector Assistance to Cover The Costs of Pensions, Public-Sector Wages. The Present Goal Is To Secure A Favourable Decision from the IMF by the end of this year.

However, The IMF Lends Only to Sovereigns Whose Debt Is Sustainable with the Prospect of the Fund Being Repaid. In 2023, the IMF Approved The Extended Fund Facility of Ukraine, A FIRST-AVERT PROGRAMME FOR A COUNTRY AT WAR Given the Exception Made by Approving the Current USD 15.5bn Program, The Imf Will Have to Re-Assess Ukraine Protrakted War, Before Approving a New Program.

A CORE IMF PROGRAMME OBJECTIVE THAT PUBLIC DEBT, Excluding The extraorrdinary revenue revenue acceleration (ERA) Loans, Will Fall To 82% of GDP by 2028 and 65% of GDP BY 203333333333333333 Heads Into It Fifth Year. The IMF’s Original Baseline Assumption Was for the War to have wound Down by the end of Last Year.

However, The Ukrainian Government’s Debt Continues to Increase (Figure 2). The IMF has revised it Own Debt Projects Up Despite The Successful 2024 Restructuring of USD 20.5bn of EuropeD Securities. Scope Ratings’ Long-Standing Assumption of Protrakted Conflict Suggests The War Might Easily Continue Beyond Mid-2026-Which Is The IMF’s Downside Scenario for the Conflict.

Figure 2. Ukrainian Debt Sustainability Remains Challenging As the War Drags On

NB Scope and IMF Projects Are for the Public and Publicly Guaranteed Debt Stock of Ukraine Including the Era Loans. June-2024 IMF Projects Made Before The August-2024 Eurobond Debt Restructuring. Source: IMF, Scope Rathings. Meeting The Finance Gap Represents and Historic Challenge – Especially for the EU FUNDING UKRAINE REPRESENTS AND HISTORIC CHALLENGE GIVEN the IMF Estimates the Country’s Additional Foreign Finance Requirement at End-2027. The Government in Kyiv Has Recently Acceptted the IMF Appraisals, After Initialy Estimating the Gap at Just USD 38bn. The Fund May Assume Budget Deficits of Nearer to 20% of GDP A Year Lasting for Longer, Updating ITS Earlier Less-Conservative Project of a Rapidly Narrowing Deficit.

All Told, Ukraine Needs to Secure Around USD 50BN A YEAR FROM ITS Allies. In View of the Likely Hesitation of the US Under President Donald Trump to Provide More Financial Support, The European Union – Already Ukraine’s Single Largest Fincier.

These Figures Do not Consider the Further Military Financing Needs of Ukraine, Making It Hard to See How The Country and ITS Allies Can Mobilise The Necessary Funds Funds Many Eu Member States have stretched finans while the resources of the eu macro-financial assistance+ facility and the G-7 Era Loans (which already use of the same assazed Rused Rused.

An innovative Proposal From the European Commission (EC) is to use the available Cash Balance Generated by the Frozen Russian Assets, Equivalent to Armund Eur 140Bn. The Plan, Still Being Debated, Wound See The Substitution of the Balance Genered by Matured Russian Assets with Zero-Coupon Short-Term Eu Bods Ensuring Rusu. The Cash Balance Wound Be Extended As Zero-Interest “Reparations” Loans to Ukraine, Repayable Only If Russia Ceases The War and Compensates Ukraine For Damages. As it is unlikely Russia would every payr Pay Ukraine for the Damages of the War, The Loans to Ukraine would effectiely be grants. Among Options Under Consideration is Making Bilateral Bond Guarantees to Sidestep The Possible Veto of the Eu’s Plan by Member States Such as Hungary.

German Chancellor Friedrich Merz Supports The Ec’s Proposal, with A Preference for Proceeds to Be Used Exclusively to Procure Military Equipment. The EC Plan Invites Partners with Frozen Russian Assets to Participate. The British Government Has Prestened a parallel Proposal for RepACAGING AROUND GBP 25BN of UK-Held Russia Assets As Loans.

Question Remains of Wather Ukraine Needs Further External Debt Restructuring The Question Remains if Deeper External Debt Restructuring Might Be Needed To Support Ukraine’s Debt Sustainability, Sustain IMF Support and Help Plug External Financing Gaps. The IMF MOST RECENTLY assessed the debt of Ukraine as Unesustainable Absent the Full Implementation of the Debt-Restructing Strategy. The assumptions around How Long the War Will Last and It ITS Impact on Associated Debt and deficit Projects Have Deteriorated Since.

Ukraine Continues Re-Negotating the So-Called Perimeter External Claims-Such As The GDP Warrant Securities-and Has Agreed to Second-Stage Restruct Late 2026. Only the Narrow Restructuring of Select G-7 Loans Provides to Ukraine Before The Full-Scale War.

Neverthaless, The Sovereign’s Eurobonds – Rated CCC and Negative Outlook by Scope – Are Not Necessarily Out of the Woods. The Successful 2024 Restructuring Included An Effective 35.75% HAIRCUT AFTER UKRAINE AND THE IMF FAILED TO ACHIEVE THE UP TO 60% HAIRCUT INITIALLY SOUGHT. Coupon Payments Following the restructuring step up by 2026-27-Assisted at the Time by the Fund As Post-War Reconstruction Years-With An Original USD 1.2bn Principal Falling. A Sweetener Granted to Asset Managers Last Year to Increase Participation May Involve An Increase of Up to 12% of the Pre-Structuring Europe Gdn’s Deep. thresholds.

Should an external Financing Gap Emerge, Such Channelling of Official Funding for Repaying Private Investors May Come Come Come Under Greater Scrutiny. If debt Sustainability cannot be assured Through Other Means, The Restricted Options for Relief from Debt Operations Mean The Europe Remain Subordinated.

In the aftermath of the 2024 restructuring, the Eurobonds Represent Less than 10% of the outstanding public debt stock of Ukraine. Neverthaless, The Eurobond Securities Are The Only Available Conduit for Achieving Meaningful Savings from Debt Restructuring Once The Renegotations of the GDP Warrantes Arets.

Much of the debt Service of the sovereign is tied to the domestic debt, not subject to reProfiling so long as the war requires the Finance Support of Ukraine – A Priority.

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Dennis Y. Shen Is The Chair of the Macro Economic Council and Lead Global Economist of Scope Group. The Rating Agency’s Macroeconomic Council Brings Together The Company’s Credit Opinions from Multiple Issuer Classes: Sovereign and Public Sector, Fincial Institute, Corporate Finance.