Ukraine Country Report Aug21 - August, 2021

August 3, 2021


Ukraine’s economy is recovering nicely and likely to show its highest quarterly growth since 2007 in the second quarter - about 8.0% year-on-year – after five successive quarters of decline caused by lockdowns due to the pandemic.

The government lifted almost all restrictions in May following a decrease in the number of new infections, helping restore activity in the industrial and service sectors amid strong consumer demand, which is also being fuelled by rising wages and falling unemployment.

Ukraine’s exports are also booming on the back of high commodity prices and the current account surplus is swelling. The extra income will come as a welcome relief for cash-strapped Kyiv, which is wondering how it can finance an $11bn debt redemption spike in September and a large budget deficit.

Although the IMF programme is still frozen talks are ongoing and reportedly progress is being made. However, it remains unlikely that Ukraine will receive the $700mn tranche that is still due. But the IMF has promised to give Ukraine $2.7bn as post-coronavirus pandemic relief with no strings attached, which will take the pressure off the government’s finances in the second half of the year.

The trade receipts are feeding through into the current account surplus that appeared last year as imports tumbled during the crisis year of 2020 and then was boosted as commodity prices took off last autumn in anticipation of this year’s recovery.

Ukraine’s current account surplus grew to $723mn in May, up from $443mn in April, reports the National Bank of Ukraine. Behind the growth was a surge in export earnings from: mineral products +188% y/y; ferrous metals + 95%; food exports + 29%; chemicals +57%; machinery + 30%.

The boost in trade and the current account is not only due to low base effects, but also driven by genuine underlying growth. Ukraine’s foreign trade in goods increased by almost 30% for the first half of this year, compared to the same January-June period last year. Compared to the first half of 2019, the last ‘normal’ year, trade is up 22% and the trade deficit is down 60%, to $1.25bn.

The improving profits of Ukraine Inc have taken some pressure of the state budget. The just-unveiled parameters of the 2021-23 federal budget were generally in line with what was previously disclosed in the media and taken by analysts as positive.

Ukraine’s general budget deficit shrank to a UAH3.0bn deficit in March from UAH10.0bn in the prior month, according to the State Treasury. General budget revenue jumped 24.0% y/y to UAH138.3bn ($5bn), rising from 8.0% y/y in February. General budget expenditures increased 10.6% y/y to UAH116.4bn, slowing from 19.1% y/y growth in February. In 1Q21, the general budget deficit amounted to UAH6.3bn (vs. a deficit of UAH17.3bn in 1Q20).

The increasing economic activity has lead to more tax revenues and reforms to the tax service have also improved collection. As part of Zelenskiy anti-oligarch drive tax collection should improve further this year as the government has rejigged the taxes on metals that will end some of the extra low tax regimes that oligarchs like Rinat Akhmetov have been enjoying and bring over $1bn of extra revenues into the budget. Tax revenue surged 23.0% y/y to UAH124.8bn in March, accelerating from 9.1% y/y growth in February.

On the political front Ukrainian president Volodymyr Zelenskiy’s anti-oligarch campaign continues, although so far it remains limited to attacks on oligarchs that are also political rivals, such as Viktor Medvedchuk, the head of the Political Council of the Opposition Platform, For Life Party.

However, laws have been passed that will end tax breaks for non-political oligarchs like Rinat Akhmetov. And the anticorruption laws that were nixed by the Constitutional Court last autumn are being replaced with new laws as per the IMF’s demands.

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