Ukraine government sees 40% GDP growth in five years, triggers worries over debt repayment

Ukraine government sees 40% GDP growth in five years, triggers worries over debt repayment
Ukrainian Prime Minister Oleksiy Honcharuk expects that Ukraine's GDP will grow by 5% in 2020, and expand by 40% over the next five year / wiki
By bne IntelliNews September 4, 2019

Ukrainian Prime Minister Oleksiy Honcharuk expects that Ukraine's GDP will grow by 5% in 2020, and over the next five years the government will ensure that the economy grows by "at least 40%", he said n September 2.

"To do this, we should grow by 5% next year and by at least 7% per year in all subsequent years," Honcharuk said before the government meeting in Kyiv, adding that his cabinet will reinforce plans for such economic growth with its first decision.

"Today we received a draft [decision] from the Ministry of Internal Affairs, according to which the economic unit in the National Police is being liquidated, that is, the police should not interfere in the business," news agency Interfax quoted the PM as saying.

Meanwhile, Alexander Paraschiy at Kyiv-based brokerage Concorde Capital pointed out in a note published on August 3 that such economic growth will have a direct impact on Ukraine’s payments under GDP warrants issued in 2015 as part of the $15bn foreign debt restructuring deal.

Assuming the projected by Honcharuk 2020-2024 growth rate, the inflation rate projected by the National Bank of Ukraine (NBU), and the UAH/USD exchange rate's development in line with the hryvnia's purchasing power parity vs. the US dollar, Ukraine will have to pay about $9bn on the warrants in 2022-2026, according to Paraschiy's calculations.

“At a discount rate of 10%, we estimate the NPV of 2022-2026 payments under the warrants amounts to $5.4bn, which is 166% of their par value (their current price is 88% of par),” he added.

"If the government is serious about the economy’s growth, the first step it should implement is to offer an exchange of the warrants into some fixed income instrument," Paraschiy wrote in a note.

The additional VRI payments will be triggered if GDP grows at more than 3% per year, and if nominal GDP exceeds $125bn (compared to approximately $85bn in 2015). Ukraine should meet both these criteria this year.

Payments under these conditions will not start before January 2021 and will end in 2040. They will be made two years after the relevant thresholds have been crossed; for example, payments triggered by GDP data for 2019 will be made in 2021. Payments will be limited to a total of 1% of GDP in the reference year until 2015, when this ceiling will be lifted.

On July 19, the NBU revised its economic growth forecast for 2019 to 3% year-on-year compared with its April macroeconomic forecast of 2.5% y/y.

The 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".

Domestic demand will remain the main driver of economic growth over the coming years. Private consumption growth will decelerate, albeit remaining high owing to an increase in real household income - wages, pensions and remittances from abroad. Capital investment will continue to expand rapidly, which will also provide significant support to the economy, the NBU added.

Economic growth will be dampened by weak global economic activity and a decrease in gas transits to "European countries starting in 2020, due to the construction of bypassing gas pipelines," the statement reads.

In March, the Ukrainian economy ministry revised downward its forecast for the growth of Ukraine's real GDP in 2019 to 2.8% y/y from 3% y/y. The ministry also forecasts 2020 growth of 3.8% y/y, and in 2021 of 4.1% y/y, according to local media.

The International Monetary Fund (IMF) has kept its forecasts for Ukraine's GDP growth in 2019 and 2020 unchanged at 2.7% y/y and 3% y/y respectively.

The European Bank for Reconstruction and Development (EBRD) has revised downward its forecast for the growth of Ukraine's real GDP in 2019 to 2.8% y/y from 3% y/y. The multinational lender's also forecasts that the nation's economy will expand by 3% y/y in 2020.

The EBRD believes that large payments on public debt scheduled for 2019-2020 pose a serious risk to the economic development of Ukraine. Therefore maintaining co-operation with creditors remains vital for the recovery of the country's economy.

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