Ukraine Country Report Jul19 - July , 2019

July 5, 2019

Ukraine GDP rose 2.5% in 1Q19, updated stats show. The economy continues to underperform. Following the 15% contraction in 2016 the economy should be bouncing back more vigorously than it is but the combination of war with Russia and political uncertainty caused by the up coming Rada elections means that investors are waiting for the dust to settle. Having said that international retailers, like IKEA and Metro, are already moving in and construction and the real estate sector are already picking up – early signs of an economic recovery. The fate of Ukraine’s further growth depends heavily on the outcome of the Rada elections and Ukrainian president Volodymyr Zelenskiy’s ability to push ahead with the reform agenda – especially in tackling the all important corruption issue.

Ukraine’s real GDP growth slowed to 2.5% y/y in 1Q19, or 0.3% q/q on a seasonally adjusted basis, to UAH808bn ($29.6bn), the State Statistics Service reported on June 19, revising upward its preliminary estimate of 2.2% y/y and 0.2% q/q growth. Ukraine’s economy grew 3.5% y/y in the fourth quarter of 2018.

Likewise, Ukraine's industrial output increased 1.6% y/y in May, slowing from 5.2% y/y in April, due to weaker growth in manufacturing, the State Statistics Service reported on June 24. Seasonally adjusted output declined 0.9% m/m. In 5M19, industrial output climbed 0.9% y/y.

The National Bank of Ukraine (NBU) is still struggling to contain inflation, which accelerated to 9.6% y/y from 8.8% y/y in April. As a result the central bank kept key policy rate at 17.5% at its June meeting, citing increasing risks. The NBU is being tough, targeting inflation over the need to cut rates to boost growth, but this has had a positive effect on bond investors which have been flooding into the local debt market since it was hooked up to Clearstream a month ago and non-residents already own some 6% of outstanding bonds from next to nothing a year ago.

In his first major economic reform, the Rada sent a bill to reform the power market and improve the trading of electricity went was read in the Rada, but implementation was delayed, and could be delayed by as much as a year. Ukraine’s donors, while applauding the reform, warned the government not to rush it as getting the reform right will have a major impact on the economy. The plan is to move from a single agent that buys power to a more sophisticated system that allows trading to make the market more responsive to changes in demand and supply. Zelenskiy also said in June that creating a market for farmland and improving the investment climate are at the top of his policy agenda – policies that will be welcomed by Ukraine’s donors. But the real launch of Zelenskiy’s reforms can only start in the autumn after the Rada elections.

Investors are wondering exactly what is the relation between Zelenskiy and his mentor, oligarch Ihor Kolomoisky. Zelenskiy put some distance between himself and his media benefactor by saying clearly the government will not denationalise Privatbank, that used to belong to Kolomoisky, nor would it default on its IMF debt, as Kolomoisky suggested Ukraine should do in an interview. However, Zelenskiy’s remarks need to be muted as he still needs the help of Kolomoisky’s media empire for his Servant of the People (SOTP) party to win a large share of parliamentary seats in the July 21 general election.

The early elections are on after the Constitutional Court confirmed Zelenskiy’s right to dissolve the Rada. SOTP is well out in front polling at 35%-48% according to a raft of recent polls, against the 6%-12% the other parties are polling. Currently somewhere between five and seven parties could enter the new Rada, according to different polls. Ex Georgian president Mikheil Saakashvili could be one of those although his bid to join the race remains disputed.

While there is an outside chance SOTP will win a clean majority, more likely is SOTP will have to go into a coalition with one of the other parties. Zelenskiy’s team have ruled out a coalition with former President Petro Poroshenko’s European party or the pro-Russian Opposition party of Yuriy Boyko (aka Boiko). The most likely scenario is for SOTP to tie up with rock star’s new party Golos (aka Holos, or “Voice”) of singer and musician Svyatoslav Vakarchuk, which is polling at around 6%. A broader coalition with Yulia Tymoshenko’s Fatherland (9.1%) is also possible, although the Zelenskiy team said it would not form coalitions with “old” parties. Tymoshenko has made it clear she will insist on becoming Prime Minister as a condition to joining a coalition.

Zelenskiy agrees to revive Minsk peace talks in Normandy Four format. Zelenskiy said during his campaign that ending the war in Donbas was his top priority, and the polls show that this is also the biggest source of concern to the average Ukrainian. The president met with German Foreign Minister Heiko Maas and French Foreign Minister Jean-Yves Le Drian on May 30 in Kyiv to discuss ways to revive the Minsk Accords peace talks. “We reached the agreement that we will try to fulfil the Minsk Accords in the Normandy Four framework of talks between France, Germany, Russia and Ukraine for peace to be established in eastern Ukraine,” Maas said. Zelenskiy has reappointed former president Leonid Kuchma as Ukraine’s representative in the talks, a slightly unsavoury choice, but a heavy hitter in what was a politically pragmatic decision.

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