Ukraine Country Report Jan21 - January, 2021

January 11, 2021

Ukraine’s real GDP plunged 3.5% y/y in 3Q20 to UAH1,157bn ($41.9bn), improving from a 11.4% y/y plunge in 2Q20, the State Statistics Service reported on December 21, confirming its preliminary estimate.

The contraction will continue in the the first quarter of 2021 with GDP falling another 3%, but for the whole of 2021 the economy is expected to return to growth with an increase of 4.6%, Minister for Development of Economy, Trade and Agriculture Ihor Petrashko said in December.

"We expect a growth of 4.6% of GDP [in 2021]. Many say that this is a high figure, which has not been there for many years. But we believe that this can be achieved," the minister said during the online forum Ukrainian Investment Roadshow.

The government is hoping that after a difficult start to the year the economy will return to a positive trend in the second half of 2021.

However, a lot of uncertainty remains. Ukraine has been negotiating to buy some 8mn doses of the coronavirus vaccine and hopes to stop the pandemic in the first half of the year, but so far the government has refused to open talks with Russia to access its Sputnik V vaccine making it reliant on western developed vaccines which are still in short supply. At the same time new more infectious version of the virus is abroad and infection rates in Ukraine were running at twice the level of those in the first wave by December.

The other major issue the country faces is the lack of a functioning International Monetary Fund (IMF) $5bn Stand By Agreement (SBA). It has some $16bn of debt to repay in 2021 but so far has only collected $2.1bn from the IMF programme. A second payment of $700mn due in the autumn of 2020 was not delivered due to backsliding on reform and in particular a constitution court ruling undoing many of the IMF-mandated anti-corruption laws.

Ukraine finished 2020 with just over $29bn in reserves, its highest level for eight years and the equivalent of just over five months of import cover – more than the three months economists deem necessary to ensure the stability of the currency.

Of the debt repayments, the schedule is heavily weighted to the third quarter of the year with only $2bn due in the first half of the year. In December Ministry of Finance increased the rates to 10%-12% on the local Ukraine’s Ministry of Finance hryvnia-denominated OVDP treasury bills (OVDP) and attracted a record $2.8bn of investment. Between the small surplus the government has in reserves and the ability to tap the local bond market the government should be able to comfortably fund the deficit spending planned for the first half of 2021, but analysts says the government cant get through the second half of the year without the IMF’s help.

Ukrainian president Volodymyr Zelenskiy has seen his popularity slide steadily as the reform effort stalls and the oligarch – especially Ihor Kolomoisky – actively work to undermine his position. However, he remains the most popular politician in the country and would still win an election if it were held this weekend.

But the disillusionment is rising as the number of Ukrainians that think the country is going in the “wrong direction” climbs back to its previous highs. In this sense Zelenskiy has been unlucky as until 2020 the country was making steady progress. Reforms were being pushed through. Investment in sectors like retail and construction was beginning. And incomes had started to rise. If 2021 proves to be a little easier then Ukraine could start to build up that momentum again.

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