Ukraine Country Report Jul17 - July , 2017

August 1, 2017

Ukraine’s GDP was up by 2.5% y/y in the first half of this year, which is also in line with the result in the first quarter, according to Economy Ministry estimates. The result was encouraging and running ahead of the full year forecast of 1.9%, which was downgraded from 2.5% earlier, after the government took into account the negative impact of the economic blockade on the disputed Donbas region.

However, the result is still well below par. Ukraine has all its catch up potential ahead of it and is capable of growing much faster. The government’s failure to commit to wholesale reform, the almost total absence of any real foreign direct investment (FDI) and the lack of action to deal with the cancer of corruption means the economy is growing on the strength of its dead cat bounce rather than to any fundamental changes.

Nevertheless, some things are going well. Real reforms have been made in the banking and energy sector. National gas monopoly Naftogaz was in profit for the first time in five years and even paid the budget dividends after IMF-backed reforms forced a hike in tariffs.

Of the three critical reforms on the IMF’s docket for this year only pension reform will happen and the draft law has already passed the first of three readings. The land reform – that would create a market for land – was conclusively shot down by deputies and now is unlikely to happen until after the 2019 elections. The IMF has tacitly agreed to put the reform to one side for the moment. Likewise, refomrs to the judicial system have by sidetracked by overt political interference by the presidential administration and are unlikely to succeed.

Finally, President Petro Poroshenko stripped the citizenship of former Georgian president and one time governor of Odessa Mikheil Saakashvili, who he saw as political rival in the upcoming elections. The move left Saakashvili stateless and was illegal under international law. It appears that Poroshenko has miscalculated as the move caused heavy criticism from the western partners. More importantly the international press have begun to run scathing pieces about Poroshenko’s lack of progress. 75% of the population think the country is going in the wrong direction, half want early elections now, and Poorshenko’s party has fallen behind his rival Tymoshenko’s party in polls.

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