Ukraine Country Report May19 - May, 2019

May 3, 2019

Ukraine starts a new chapter following the landslide victory for Ukraine’s president-elect Volodymyr Zelenskiy in the presidential election on April 21, but whether it will lead to a new beginning remains open to question until the October parliamentary elections are complete.

The constitution gives the president direct control over the Finance and Defence Ministries and the right to appoint the general prosecutor, but the ministers that do much of the day to day work– such as Economics, Social and Interior – are all appointed by the government. The Rada is currently packed with deputies that are controlled by oligarchs (or are oligarchs themselves) and former President Petro Poroshenko eponymous bloc remains the largest party fraction in parliament.

Poroshenko was ousted for his failure to end this oligarchic system and to tackle corruption. However, on his watch there has been a lot of progress with the economy and exchange rates stabilisation as well as significant banking sector reforms.

The agricultural sector is flourishing and grain exports are a major source of foreign exchange earnings, as are metals to a less extent. However, after more than two decades of neglect Ukraine is currently the poorest country in Europe, according to the International Monetary Fund (IMF), and with its visa-free travel deal with the EU some 6mn from a population of 43mn Ukrainians have left the country to look for work. Labour is now Ukraine’s third biggest export item and brought in $14bn in remittances in 2018.

With just over a fifth of the economically active workers in other countries, coupled with a slew of economic problems, including very low domestic and international investment, the economy continues to perform well below potential.

The GDP growth of 3.4% in 2018 is expected to slow this year to 2.8% before recovering to 3.8% in 2021. The National Bank of Ukraine (NBU) cut rates in April, after hiking them twice in the last quarter of 2018, but the overnight rate remains at a punishing 18% which is smothering growth. The prospects for more rate cuts this year are good thanks to easing inflation pressure. Inflation rose to 10% at the end of last year, but was down to 8.6% in March and is on track to fall to 6-7% by the end of this year.

While the economy is going in the right direction it will still take several years before economic growth can build up any momentum and benefit from a virtuous circle of spending-profits-investments-wage hikes, but when this wheel does start turning the country should have many years of rapid growth to look forward to.

In the meantime the government needs to manage the economy carefully. Debt obligations postponed for five years by former Finance Minister Natalia Jaresko start coming due this year. With the help of some $6bn in donor money, a planned $4.2bn Eurobond issue and another $2-6bn that can be raised on the rapidly developing domestic debt market, the government looks like it will be able to cope with the growing debt payments in the next few years. But with reserves of only $20bn to ensure debt payments that run between $12bn and $16bn a year in the next five years, Ukraine remains very exposed to external shocks or more political turmoil.

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