Mid â€“ year Ukraine: a case for cautious optimism?
By Chris Weston, CEE Consulting Group
Despite two years of catastrophic headlines, Ukraine may be bouncing back according to a recently issued report by the SigmaBleyzer private equity investment management firm and The Bleyzer Foundation.
But first things first: GDP is still expected to decline 9 percent this year according to the IMF with a 11-percent decrease forecast by Bleyzer. That said, this is â€śgood newsâ€ť since the first half of the year saw a decrease in GDP of an eye watering 16 percent.
Monthly production data suggests that the Ukrainian economy bottomed out in the second quarter of 2015. In fact, on a month-to-month basis industrial production increased by 1.5 percent month-on-month in June, following a similar increases in many industrial sub-sectors in May.
Output recovery is taking place in a number of industrial subsectors, including car manufacturing, machine-building, furniture, textiles, wood and paper, oil and gas extraction, rubber and plastics, and chemicals. It goes without saying that those subsectors involving metallurgy and mining, located in the contested eastern Ukraine, remain firmly in decline mode.
During June 2015 state budget revenues increased at a rapid pace, due to the favourable effects of past inflation and currency devaluations on taxation. However, pressures remain on government spending, due to increased military expenditures and a consolidated budget deficit of 8 percent is still expected for 2015.
In June, inflation continued to decelerate but at a slower pace than previously expected. CPI growth decelerated from 60.7 percent y-o-y in April to 58.4 percent y-o-y in May and to 57.5 percent y-o-y in June. This is expected to reach 45 percent by the end of the year. Still high but at least on a downward trend and expectations of inflation are of 26 percent by mid-2016.
A Consumer Confidence survey carried out by GfK Ukraine shows that its consumer confidence index improved to 48.8, which is 3.3 points higher than in May, with an increase in the index of propensity to consume to 57.2, 8 points higher than in May. Still hard times are ahead for the average Ukrainian who has seen income falls by about 40 â€“ 50 percent over the last few years.
Ukraine`s foreign exchange situation improved in Q2 2015, with the UAH/USD exchange rate gradually appreciating from slightly above 23 UAH/USD in April to about 21 UAH/USD in July.
Ukraine`s current account â€“ i.e. export of goods and services less imports, – has also improved. This is likely to come under pressure from September as the country purchases gas for the run up to winter. The National Bank of Ukraine has accumulated gross international reserves, which reached USD 10.4 bln at the end of June, and which was sufficient to cover 2.2 months of future imports. The NBU has recently announced it intends to accumulate USD 15 bln, which would provide a greater cushion of safety.
The country still remains essentially a ward of international financial institutions, the EU and USA. On July 31, 2015 the IMF Board approved the disbursements to Ukraine of USD 1.7 bln under its EFF Program.
Ukraine and its Eurobond creditors remain in negotiations regarding Ukraineâ€™s external debt restructuring with Ukraine seeking a 40 percent â€śhaircutâ€ť versus the creditors of just 5 percent. These discussions are ongoing and no speedy settlement is expected soon. That said, there has been a marked strengthening of investor optimism as reflected in the increased price of Ukrainian Eurobonds repayable in 2017 being traded.
The 2014 year end an early 2015 saw the collapse of several Ukrainian banks. Of 180 banks active in 2014, only 129 remained active in July 2015. Bank deposits of non-financial corporations increased bringing the cumulative annualized growth to 1.5 percent compared with a 5.4 percent decline in May. However, householdsâ€™ deposits with commercial banks remained flat at the previous monthly level, posting an annualized decrease of 28.5 percent.
Issues still remain that might imperil the modest improvement noted above:
- A worsening of fighting in the east.
- Lack of any progress in effecting structural reforms affecting: creation of a specialized anti-corruption unit; privatisation; and adoption of legislation necessary for the implementation of the law on the energy market. These essentially remain problems due to the lack of political will at the government level. They may yet compromise the all-important ongoing external financial support provided.
Ukraine is by no means out of the woods yet but its economy may have pulled up from its erstwhile harrowing descent.
Photo courtesy of Elke Wetzig (Wikimedia Commons).