LONDON, June 16 – Ukraine's new IMF program will help the country meet its 2020 financing needs and could help to preserve earlier reforms, supporting a post-coronavirus recovery, Fitch Ratings reported Tuesday.

However, weak compliance with previous programs and the long process of agreeing the deal (also partly due to the coronavirus crisis) highlight likely implementation challenges.

The IMF approved the $5 billion, 18-month Stand-By Arrangement (SBA) on June 9, which is “consistent with our baseline expectation,” Fitch Ratings said, adding that $2.1 billion will be disbursed immediately. Four additional disbursements are contingent on reviews over the program's life.

The front-loaded SBA supports Ukraine's sovereign creditworthiness by providing budget and balance-of-payments financing during the coronavirus crisis.

“We viewed an IMF agreement as essential to meet this year's $20 billion of fiscal financing needs,” Fitch Ratings said.

The move will probably trigger official sector lending from the EU, which has disbursed EUR 500 million under the fourth macro-financial assistance program, to provide another EUR 1.2 billion to support Ukraine's crisis response. It will potentially help secure $1 billion from the World Bank. It should also support access to domestic and possibly external market financing.

“Our revision of the Outlook on Ukraine's 'B' sovereign rating to Stable from Positive in April 2020 reflected how the pandemic will partly reverse Ukraine's sovereign debt decline and its return to stable (if sluggish) growth since 2014-2015. We forecast real GDP to contract by 6.5% this year and the fiscal deficit to widen to 7.1% of GDP,” Fitch Ratings said.

Domestic political factors meant it took time to secure the program. “President Zelenskiy's popularity, the governing party's majority in the Rada, and the presence of technocratic and pro-reform policymakers in government provided a favorable backdrop following last July's elections,” Fitch Ratings said.

“But visible resistance to reform by vested interests including oligarchs, the effective fragmentation of the president's party in the Rada, and early changes to key cabinet positions weighed on reform momentum, diluted key legislation, such as agricultural land reform, and risked creating policy uncertainty,” Fitch Ratings said.

“We think a key challenge faced by Zelenskiy's administration is to renew its reformist credentials at a potentially rising political cost,” Fitch Ratings said. “Predictable, regular progress under the SBA would reduce refinancing risk and preserve some of the recent improvement in the currency and maturity composition of government debt. It could improve recovery prospects by addressing constraints on private investment, such as the weak rule of law.” (fr/ez)