The Government of Ukraine’s newly signed USD 15.6bn IMF programme is expected to take centre stage at the IMF Spring Meetings, as policymakers and finance professionals gather in Washington DC next week, according to market participants.
“Ukraine will be the big story which overshadows everything else,” said a sovereign debt advisor. “It was a puzzle to get there, and required augmenting the access limit, modifying the IMF’s financing assurances policy, but it all came together with the Upper Credit Tranche programme in March.”
The new IMF programme implies investors will provide another payment standstill until 2027, beyond the standstill on close to USD 20bn in bonds agreed last summer, which lasts until mid-2024, according to Petar Atanasov, co-head of sovereign research and strategy at Gramercy.
Ukraine’s official creditors, including Canada, France, Germany, Japan, the UK and the US, have already provided financing assurances to extend the standstill and provide additional debt treatment, with bondholders expected to follow suit.
“I expect the Ukrainian authorities and IMF to communicate and discuss their plans more fully during the upcoming IMF Spring Meetings and the market could get an initial idea of what the official proposal to private creditors might include,” said Atanasov.
The hope is that by 2027 Russia’s war on Ukraine could be over and there could be some visibility on the real scale of reconstruction needs, so creditors might be able to assess what the debt sustainability situation looks like, he continued.
“We do not see an end to the conflict on the horizon unfortunately, but things can of course change by the end of the programme,” Atanasov cautioned.
The IMF estimates Ukraine's total financing gap will range from USD 115bn to USD 140bn over the next 48 months, depending on how the war evolves.
Despite Ukraine’s recent programme sign-off, some countries seeking new IMF programmes are unhappy that the rules were modified for Ukraine but not for them, the sovereign advisor said.
The recent changes apply only to cases of “exceptionally high uncertainty”, such as the one Ukraine faces as Russia’s full-scale invasion continues.
“It will be interesting to see how it shapes the debates during the DC meetings," the advisor said.
Restructuring deadlock
The first formal meeting of the so-called sovereign debt roundtable is also set to take place in DC, following on from preliminary talks in Bengaluru in February.
The roundtable seeks to break the impasse in sovereign workouts by bringing together several borrowing countries such as Ethiopia and Suriname, official creditors such as India, China and the US, and private sector creditors including Standard Chartered and Blackrock.
“[The roundtable] is a great initiative and we should appreciate the staff of the IMF and the World Bank for pushing it,” said Reza Baqir, global practice leader of Alvarez & Marsal’s newly launched Sovereign Advisory Services.
“We should not underestimate the magnitude of the problem involved. A number of countries currently face problems not just of liquidity but also of solvency.”
But it may do little to break the deadlock in sovereign debt restructurings, which according to Gramercy’s Atanasov, comes from “profound structural and geopolitical disagreements”, that are highly unlikely to be resolved any time soon.
Some have blamed the G20 Common Framework (CF) for delays to debt overhauls in Zambia. But Sri Lanka, whose middle-income status makes it ineligible for CF treatment, spent almost a year trying to secure an IMF programme, and is yet to reach a restructuring agreement.
Chad was the first country to graduate from the CF, but with the peculiar result that official creditors said that no debt relief was needed after oil prices surged.
Ethiopia’s delays are predominantly down to donor concerns over alleged human rights abuses during the recently ended civil war, but IMF programme talks seem to be moving.
Ghana’s restructuring under the CF appears to be progressing faster than that of its peers, though China’s unusually low exposure relative to other African restructurings may have a role in this, the sovereign advisor said.
More than the CF itself, some point to the rise of new creditors such as bondholders and China, to the detriment of more traditional Paris Club creditors, as having fundamentally altered the dynamics of sovereign debt workouts.
A major problem is China's perception that its current representation at multilateral organisations such as the IMF is not consistent with its weight in the global economy, Atanasov said.
“This appears to complicate official sector intra-creditor cooperation and coordination and has arguably contributed to delays in recent and ongoing sovereign debt restructurings,” Atanasov continued. China’s apparent aversion to principal haircuts is also a point of contention.
A feeling that the world is becoming more fragmented is permeating many aspects of sovereign debt restructurings, the sovereign advisor agreed.
“Many of the conversations are not focused on market dynamics, but rather high-level policy discussions,” said the advisor.
“While some are trying to bring China to the table, others believe it’s a bad idea to give them more power in Western institutions such as the IMF.”
But according to Baqir, who is also a senior fellow at Harvard Kennedy School, a “China-bashing posture” will not be a constructive manner to find a framework for official creditor coordination that would have the ownership of the major bilateral official creditors.
“So long as China feels that others are being generous with its money, we will not succeed in [this] goal,” Baqir added.
Multilateral inclusion
China’s repeated demands to include non-resident holdings of domestic debt or multilateral development banks (MDBs) in debt restructurings have thrown open this divide, particularly in cases like Zambia, where they represent about USD 3.2bn and USD 2.6bn respectively out of roughly USD 20bn foreign creditor claims.
Some Zambian Eurobondholders have also expressed support for moves to restructure claims of foreign holders of domestic debt.
As for MDBs, there is precedence of them providing debt relief during the Highly Indebted Poor Country and Multilateral Debt Relief Initiative (HIPC and MDRI) initiatives of the 2000s.
But MDBs did not take haircuts directly, and instead saw their losses covered by shareholders, the sovereign debt advisor noted. “It wasn’t the World Bank taking haircuts, it was the UK or the US writing the cheque,” said the sovereign advisor. “I don’t see that happening this time round.”
While the DC meetings are unlikely to make headway on these broader strategic issues, more modest developments might be achieved.
“The IMF will want something to come out from this roundtable, and there is some low-hanging fruit within reach,” the advisor said. “More transparency and earlier sharing of the IMF’s debt sustainability analysis, as well as more clarity on restructuring cut-off dates could be a start.”
Proposals to encourage creditors to make the first move, such as so-called most-favoured creditor clauses which guarantee a reopening of negotiations if laggard creditors are offered better terms, could also be something to explore, a second sovereign advisor noted.
Financing routes
As borrowing costs continue to be prohibitive for many emerging markets, the DC meetings are also expected to focus on meeting funding needs.
Higher-rated EMs such as Morocco, Senegal and Cote d’Ivoire have sought new IMF programmes and precautionary liquidity lines, maximising available concessional finance despite having market access.
Blended finance structures try to play a middle ground by using multilateral instruments to try and get private investors involved, according to Christopher Marks, head of emerging markets for MUFG.
“But it still is a specialised market, and it requires appetite from bilateral and multilateral partners to support this,” Marks said.
“At the same time, these players are cautious in respect of their risk-taking, mindful of pandemic-era outflows to clients suffering ratings migration, and therefore mindful of their own ratings in turn.”
There have been many proposals to make productive new use of special drawing rights (SDRs) following the eye-watering USD 650bn SDR allocation of August 2021. But according to Marks, the IMF has to date resisted more progressive solutions, preferring to create trust vehicles wholly within the institution’s perimeter.
“In part this is a function of risk-aversion by member countries,” Marks said. “Wealthy countries can indeed grant their SDR to poorer countries to support specific initiatives. But the SDR is a long-term liability to the SDR Department, so the granting country takes the risk that the SDR will not be remitted back in time or in full.”
The IMF’s Resilience and Sustainability Trust, which Rwanda was the first country to unlock last December, presents itself as a step forward in this conversation, Marks said.
This is a “trust still within the IMF system, but using granted SDR for climate-resilience purposes, rather than traditional IMF tools or the structural reform menu,” he added.
