Ukraine Country Report Jun19 - June, 2019

June 5, 2019

Things are moving fast in Ukraine but actually any changes are on hold until after the elections for a new parliament are complete in July.

Despite being a neophyte Ukrainian president Volodymyr Zelenskiy came out of the gate blasting and dissolved the Verkhovna Rada during his inauguration speech. Some confusion remains as to if we has the power to do this, but with three quarters of the population behind him he is in a position to steam roller any opposition. The constitutional court has already thrown out one case to prevent the early elections.

Zelenskiy remains a dark horse but all his comments so far suggest that he will continue to follow the liberal reform pro-west agenda.

His relationship to Ukraine’s uber-oligarch Ihor Kolomoisky remains a concern but after Kolomoisky suggested Ukraine default on its IMF debt Zelenskiy came out a few days later saying that the IMF deal is on track and will continue as planned.

Economic growth is subdued and will be down this year on last year as the country has been paralysed by the elections to some extent. However, in the second half of this year growth is expected to accelerate. But there is a lot of work to do.

Ukraine in terms of GDP per capita remains of the poorest countries in Europe, along with Moldova, Armenia and Georgia, according to a World Bank special report titled "Tapping Ukraine’s growth potential."

The World Bank notes that at the growth rate of recent years, it will take Ukraine more than 50 years to reach income levels of today’s Poland. "If Ukraine’s productivity growth and investment rate remains at the low levels observed in recent years, overt the medium-term the growth rate will converge to almost zero per annum," according to the report.

The World Bank points out that the Ukrainian economy "continues to be constrained by unfinished reforms that lead to low productivity, over-reliance on commodity-based exports, limited foreign direct investment and global economic integration, and weak institutions."

In order to change the situation for the better, the World Bank suggest that Ukraine should carry out reforms in three areas: limiting the role of the state in the economy; facilitating investments, improving logistics and connectivity to fully leverage external trade opportunities; maintaining stable macroeconomic policies, giving everyone an equal opportunity and strengthening rule of law to make economic institutions more resilient.

The growth of Ukraine’s real GDP in the first quarter of 2019 slowed to 2.2% compared to the same period last year, against 3.5% in the fourth quarter of 2018 and 3.3% in 2018 as a whole, according to preliminary data posted by the State Statistics Service.

At the end of April, the NBU affirmed the forecast of GDP growth for 2019-2021. According to its expectations, this year it will slow down to 2.5%, and in 2020-2021 it will accelerate to 2.9% and 3.7%, respectively.

The World Bank maintained its forecast for GDP growth in Ukraine in 2019 at 2.7%, with the European Bank for Reconstruction and Development forecasting GDP growth will slow to 2.5%.

Private household demand will continue to be the key growth driver, although its contribution will decrease. After robust salary hikes in response to emigration pressures, wage growth is sure to decelerate.

Fresh growth could come from external demand and investments. The former is unlikely to materialize soon – the global economy and Ukraine’s key trading partners are not in a high-rate growth cycle. The longer-term prospects for Ukrainian exports are undercut by its still-weak competitive position.

Investments could be a growth factor if the new president’s team finds a way to improve business and investor sentiment domestically and internationally. An ambitious and plausible plan to attract international funding into infrastructural projects, re-launch privatization in a transparent way, and ensure independence and accountability within the judicial branch would produce tangible results within two years. That may unlock additional potential and visibly accelerate economic growth starting in 2H20.

Deflation continues despite a temporary bump in headline inflation
Headline inflation picked up to 8.8% yoy in April from 8.6% in March, ending a 4-month downtrend.

The NBU has embarked on an easing cycle for monetary policy by lowering its key policy rate by 50 bps to 17.5% in late April, cutting for the first time in two years. The NBU’s communication was cautious, and some risks that could disrupt the cycle in the coming months are lurking. Looking through to the year-end, the central bank’s decisions will largely depend on how firmly inflationary expectations are anchored with businesses and households.

Ukraine is due two more IMF tranches this year of $1.3bn each, but the next one will not be paid until after the elections are over and probably not until September. However, there are prospects for a new deal where Ukraine goes back to the longer term Extended Fund Facility (EFF) from its current more restrictive Stand by agreement (SBA) and collects both payments due this year in one go in the autumn.

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