Scope Ratings (Scope) just lately trimmed its growth estimate for Ukraine to 2.0% for 2025 earlier than 2.25% for 2026 after weaker-than-expected exercise during the primary half of the yr (Figure 1). Consolidated fiscal deficits are more likely to stay elevated at round 18.3% of GDP this yr and 15.3% subsequent yr. Public debt will proceed to rise to nicely above 95% of GDP by the tip of this yr from 91.2% at end-2024 and 49% at end-2021.
Figure 1. Gloomier, unsure outlook for Ukrainian growth as estimates trimmed
Annual actual growth, %
Source: National Bank of Ukraine, IMF, World Bank and Scope forecasts
If the battle continues into subsequent yr – as seems inevitable – selections should be made across the financing of Ukraine after an present IMF programme concludes in March 2027. Ukraine has formally requested a additional four-year programme from the Fund. Military spending absorbs 60% of the entire finances, leaving Kyiv closely reliant on overseas and official-sector help to cowl the prices of pensions, public-sector wages and humanitarian assist. The current objective is to secure a beneficial determination from the IMF by the tip of this yr.
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However, the IMF lends solely to sovereigns whose debt is sustainable with the prospect of the Fund being repaid. In 2023, the IMF authorized the Extended Fund Facility of Ukraine, a first-ever programme for a nation at battle, a state of affairs which creates further uncertainty for assessing debt sustainability and the probability of reimbursement. Given the exception made by approving the present USD 15.5bn programme, the IMF should re-assess Ukraine’s debt sustainability fastidiously, amid the doable political pressures inside the United States in opposition to financing a protracted battle, earlier than approving a new programme.
A core IMF programme goal that public debt, excluding the Extraordinary Revenue Acceleration (ERA) loans, would fall to 82% of GDP by 2028 and 65% of GDP by 2033 is at risk because the full-scale battle heads into its fifth yr. The IMF’s authentic baseline assumption was for the battle to have wound down by the tip of final yr.
However, the Ukrainian authorities’s debt continues to increase (Figure 2). The IMF has revised its own debt projections up regardless of the profitable 2024 restructuring of USD 20.5bn of Eurobond securities. Scope Ratings’ long-standing assumption of protracted battle suggests the battle may simply proceed past mid-2026 – which is the IMF’s draw back state of affairs for the battle ending.
Figure 2. Ukrainian debt sustainability stays difficult because the battle drags on
Public debt, % of GDP
N.B. Scope and IMF projections are for the public and publicly assured debt stock of Ukraine together with the ERA loans. June-2024 IMF projections made earlier than the August-2024 Eurobond debt restructuring. Source: IMF, Scope Ratings.
Funding Ukraine represents an historic problem given the IMF estimates the nation’s extra overseas financing requirement at round USD 65bn to end-2027. The authorities in Kyiv has just lately accepted the IMF value determinations, after initially estimating the hole at simply USD 38bn. The Fund could assume finances deficits of nearer to twenty% of GDP a yr lasting for longer, updating its earlier less-conservative projection of a quickly narrowing deficit.
All advised, Ukraine must secure round USD 50bn a yr from its allies. In view of the doubtless hesitation of the US below President Donald Trump to offer more financial assist, the European Union – already Ukraine’s single largest financier – could need to foot a lot of the invoice.
These figures don’t contemplate the additional navy financing wants of Ukraine, making it laborious to see how the nation and its allies can mobilise the required funds with out utilizing USD 330bn in frozen Russian reserves. Many EU member states have stretched funds whereas the sources of the EU Macro-Financial Assistance+ facility and the G-7 ERA loans (which already use the curiosity on seized Russian belongings) are practically exhausted.
An progressive proposal from the European Commission (EC) is to make use of the accessible money stability generated by the frozen Russian belongings, equal to round EUR 140bn. The plan, nonetheless being debated, would see the substitution of the stability generated by matured Russian belongings with zero-coupon short-term EU bonds making certain Russia retains legal claims to the funds. The money stability can be prolonged as zero-interest “reparations” loans to Ukraine, repayable provided that Russia ceases the battle and compensates Ukraine for damages. As it’s unlikely Russia would ever pay Ukraine for the damages of the battle, the loans to Ukraine would successfully be grants. Among choices into consideration is making bilateral bond ensures to sidestep the doable veto of the EU’s plan by member states resembling Hungary.
German Chancellor Friedrich Merz helps the EC’s proposal, with a choice for proceeds for use solely to acquire navy tools. The EC plan invitations companions with frozen Russian belongings to take part. The British authorities has offered a parallel proposal for repackaging round GBP 25bn of UK-held Russian belongings as loans.
The query stays if deeper exterior debt restructuring is perhaps needed to assist Ukraine’s debt sustainability, maintain IMF assist and help plug exterior financing gaps. The IMF most just lately assessed the debt of Ukraine as unsustainable absent the complete implementation of the debt-restructuring strategy. The assumptions round how long the battle will final and its influence on related debt and deficit projections have deteriorated since.
Ukraine continues re-negotiating the so-called perimeter exterior claims – such because the GDP warrant securities – and has additionally agreed to second-stage restructuring late 2026. For now, such a transfer would contain solely the slender restructuring of choose G-7 loans offered to Ukraine earlier than the full-scale battle.
Nevertheless, the sovereign’s Eurobonds – rated CCC and Negative Outlook by Scope – usually are not essentially out of the woods. The profitable 2024 restructuring included an efficient 35.75% haircut after Ukraine and the IMF failed to attain the up to 60% haircut initially sought. Coupon funds following the restructuring step up by 2026-27 – assumed on the time by the Fund as post-war reconstruction years – with an authentic USD 1.2bn principal reimbursement falling due February 2029. In addition, a sweetener granted to asset managers final yr to increase participation could contain an increase of up to 12% of the pre-restructuring Eurobond principal by November 2029 ought to Ukraine’s GDP meet outlined thresholds.
Should an exterior financing hole emerge, such channelling of official funding for repaying non-public buyers could come below better scrutiny. If debt sustainability can’t be assured via different means, the restricted choices for aid from debt operations imply the Eurobonds stay subordinated.
In the aftermath of the 2024 restructuring, the Eurobonds signify much less than 10% of the excellent public debt stock of Ukraine. Nevertheless, the Eurobond securities are the one accessible conduit for attaining significant financial savings from debt restructuring as soon as the renegotiations of the GDP warrants are full.
Much of the debt service of the sovereign is tied to the home debt, not subject to reprofiling so long because the battle requires the financing assist of Ukrainian banks and corporates – and financial stability stays a precedence.
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Dennis Y. Shen is the Chair of the Macro Economic Council and Lead Global Economist of Scope Group. The ranking company’s Macroeconomic Council brings collectively the company’s credit opinions from a number of issuer lessons: sovereign and public sector, financial establishments, corporates, structured finance and project finance.
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