The celebrations lasted a matter of hours. That very same evening, Yakiv Smolii resigned as governor of the National Bank of Ukraine (NBU) citing “systematic political pressure”, triggering sufficient uncertainty to force the sovereign to cancel the deal.
Continued central bank independence is a key condition of Ukraine’s $5bn standby agreement with the International Monetary Fund, agreed in June.
“There are still some deep questions about whether Ukraine can stay on track with the IMF programme, and the central bank independence issue is a major factor,” says Stuart Culverhouse, head of sovereign research at Tellimer.
Yet investors found sufficient comfort in Kyrylo Shevchenko, Smolii’s replacement, for the sovereign to return to markets just three weeks after it pulled its first deal. Moreover, with EM high yield assets having rallied globally, Ukraine achieved better pricing than the first time, raising $2bn at 7.25%.
For now, there is
cautious optimism that Ukraine will do enough to keep the agreement in place. The new 2032s remained just above par in secondary markets until a broader sell-off in risk assets in the second half of September pushed the bonds to around 95.50 at the end of the month.
Even as Ukraine struggles to control the spread of coronavirus and lacks the fiscal space of most of its eastern European peers, the central bank resisted calls from President Zelensky to cut rates below 6% in September.
“This is a positive sign that the governor is taking steps to protect the NBU’s independence, which should help to keep the country’s IMF deal on track,” said Capital Economics.
Investors will now have a close eye on the progress of anti-corruption and banking sector reforms, which are also key to the IMF programme.
“You buy Ukraine because of the hard currency flowing in from the IMF,” says Ed Al-Hussainy, senior rates analyst at Columbia Threadneedle. “The macro framework is improving, but the reason there are no financing gaps is the IMF.
“If the IMF programme gets derailed, then Ukraine returns to where it was two or three years ago.”