Ukraine Country Report Nov19 - November, 2019

November 5, 2019

Ukraine’s economy is coming on very nicely. Growth is still sub-par but the economy is growing at about 3% andits still early days as the government is only two months into the job.

But before diving into the economics the whole story still turns on the politics and that is also improving. The main issue for investors is what is the relationship between Ukrainian president Volodymyr Zelenskiy and the uber oligarch Ihor Kolomoisky?

After fudging the question at his marathon press conference at the start of October with a “I don't know, leave it to the courts” the International Monetary Fund (IMF) promptly froze its negotiations on a new Extended Fund Facility (EFF). That spurred new comments from the head of the presidential administration who came out with a crystal clear: “Even if the court rules to give the Privatbank to Kolomoisky, we won’t let it happen.” These comments were repeated by Ukrainian Prime Minister Oleksiy Honcharuk in the last days of October. They will probably be enough to assure investors fears and allow for a new IMF deal by year end. That is a prerequisite for a lot more international aid money and will also reduce the prices on the international bond markets all of which is necessary to get Ukraine through the next few years.

Growth this year will end the year at about 3% says Ukrainian Finance Minister Oksana Markarova, in line with the IMF predictions. However, after that opinions divide and underscore the uncertainty of how Zelenskiy administration will go. The IMF just brought out its medium term predictions and says Ukraine will continue to grow at about 3% fro the next three years, whereas the government wants to lift growth to 7% over that period.

More interestingly the IMF says this year’s growth will come in at 2.99%, which is just below the level needed to trigger the warrant payments (3%), although even if the warrants are triggered this year no payments are due for two years and even then they will amount to few tens of millions of dollars at this level of growth. The warrants only become expensive with growth over 4% and 7% would mean that the government has to payout some 1% of GDP to investors, but a deal is expected before it gets to that level.

The National Bank of Ukraine (NBU) also revised its 2020 economic growth forecast to 3.2% y/y from 2.9%. The revisions were attributed to "stronger domestic demand, more favourable terms of trade and expectations of a larger harvest of grain crops".

And the growth drivers are starting to move into place.Real wages in Ukraine grew 9.8% y/y in September, accelerating from 7.7% y/y growth in August, the State Statistics Service reported on October 28. The average monthly nominal wage amounted to UAH10,687 a month ($431), increasing from UAH10,527 in August, or 0.7% m/m in real terms.

That is feeding through into retail turnover and that is a source of money for everyone; the Russian boom years were driven by consumer spending on the back of 10% per year wage hikes as the government sought to close the gap between the public and the private sectors and it looks like Ukraine may attempt the same thing.

Even more encouraging construction soared by 20% in September, which is the second of the three big growth drivers. (Investment is the third and that is still under performing.) Construction and rising income levels are obviously linked.
After struggling to contain inflation last year, the inflation rate is now falling steadily and slowed to 7.7% in September from 8.8% in August. That lead the National Bank of Ukraine (NBU) to slash a massive 100bp off interest rates in October, which will give the economy a growth shot in the arm going forward. The NBU is expected to ease rates further as part of the effort to kick start the virtuous circle of growth and investment.

International reserves are also stable at around $22bn or over 3 months of future import cover that will keep the exchange rate stable at around UAH25 to the dollar that is expected to rise to UAH26-27 next year.

Going forward Zelenskiy has a lot of work to do. The Minsk II peace negotiation got a fillip after Zelenskiy signed off on the Steinmeier Formula that Russia insisted on before the next Normandy Four meeting. There also has to be a ceasefire but Zelenskiy was struggling to get the paramilitary veterans to leave the combat zone, but at the time of writing it appears he has succeeded so the whole process is moving forward. Zelenskiy has to delivery on a peace deal, or at least be seen to be creditably trying to deliver and so far he is making progress.

Finally the question of Kolomoisky and Privatbank aside, the government is sticking to its hectic legislative agenda and new pro-reform, anti-corruption laws are being passed every week. In the last month 1,000 state owned companies have been removed from the list exemptng them from privatisation. The state owned railaway company is being put up an IPO in the next year. The Anti-corruption court has started work. A whistleblower law has been passed. Laws to unbundle the transport and production of gas have been passed. And dozens of other laws are due to be either enacted or presented to the Rada before the end of the year.

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