EBRD slashes Ukraine growth forecast as country goes to polls

By bne IntelliNews October 26, 2012

bne -

Voters go to the polls in a general election on October 29 that is likely to see the ruling Party of Regions returned to power, despite the growing economic problems that have prompted the European Bank for Reconstruction and Development (EBRD) to downgrade its growth forecasts for the country.

Ukraine's economy has been sliding slowly towards the abyss due to the government's reluctance to implement painful reforms demanded by the International Monetary Fund (IMF) that would release billions of dollars of badly needed stand-by loans.

The economy expanded 5.2% in 2011 after 4.7% in 2010, but has been slowing again in the second half of this year because of lower steel prices, Ukraine's main export earner. The EBRD said October 26 it now predicts that Ukraine's economy will grow by only 1.0% this year and 2.5% next year, both down by 1.5 percentage points from its previous forecast made in July.

The EBRD says Ukraine is caught between a rock and a hard place, squeezed by the European slowdown and Russia's economic problems, which have dragged down steel prices and stymied construction, both of which are key to Ukraine's growth.

The hryvnia has lost 1.6% against the dollar and analysts are widely predicting a devaluation of between 10% and 20% of the national currency before the year is out. The Ukrainian Equities Index (UX) is down 46% this year, more than any benchmark in the world, data compiled by Bloomberg show.

Voting by region

The government of Ukrainian President Viktor Yanukovych has been trying to muddle through until the election is passed, and while the economy is the main campaign issue in the US presidential election, it has played a relatively small role in Ukraine, where voting trends to be split split along geographic lines than policy choices.

Yanukovych's party dominates the eastern Russophile part of the country whereas the opposition is strongest in the Ukraine-speaking nationalistic western regions.

The Party of Regions was leading in the polls by 7% going into the election, despite the widespread dissatisfaction amongst voters and the rising corruption; under Yanukovych, Ukraine has fallen in Transparency International's Corruption Perceptions Index to 152nd place from 134th.

Part of Regions' strength is the disunity of the opposition, which has lost its most charismatic leader Yulia Tymoshenko, who is serving a seven-year sentence for abuse of office in what is widely seen as a politically motived case. Tymoshenko's Batkivshchyna party is facing a challenge from the newly formed Udar (Punch) party of world champion boxer Vitali Klitschko, which has been climbing the polls.

The opposition parties have tried to cooperate, as they largely steal votes from each other rather than impact on Region's standing. Batkivshchyna joined forces with Arseniy Yatsenyuk's Front Zmin in April and then the nationalist party Svoboda on October 19. But despite some cooperation with Udar that led to both parties withdrawing their weakest candidates in some regions to give their allies a clear run at the vote, no deal with Klitschko has been signed that would have maximised their chances at the polls.

The latest polls show the Party of Regions with 23.3% support, compared with 16% for Klitschko's UDAR, 15.1% for Tymoshenko's Batkivshchyna and 10.1% for the communists, a survey by the Kyiv-based Democratic Initiative Fund showed this week. Another 24% of voters are undecided. The margin of error is 2.2%.

"There's no strong alternative to the Party of Regions in eastern and southern Ukraine, which determine the outcome of the elections," Vadym Omelchenko, president of the Gorshenin Institute that researches social and political issues, told Reuters. "Voters are disoriented by the split opposition and it's in the interests of the Party of Regions not to allow them to unite."

The upshot is that Regions will most likely return to power, albeit with a reduced mandate, and figures like Klitschko will enter parliament for the first time where he intends to run a guerrilla war of attrition, with half an eye on the presidential elections scheduled for 2015.

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