Ukraine's economic collapse is bottoming out, but the conflict-torn country is still far from moving on to rebound growth, say analysts.

"In a difficult environment, macroeconomic stabilisation is taking hold and the economy shows signs of turning the corner," the head of the International Monetary Fund (IMF) Christiane Lagarde said in Kyiv in September. "The fiscal position is getting stronger, the foreign exchange market has stabilised, and the banking sector is being repaired so that banks are sounder and can start to provide credit again," she added.

"Policies are on the right track and have started to yield results," said Lagarde, whose organisation extended Ukraine a vital $17.5bn extended fund facility (EFF) in March to prevent the economy from collapsing completely.

"Given the deceleration in output declines during recent months, the economy is turning around, though at a slow pace," US investment company SigmaBleyzer confirmed in an extensive analysis of Ukraine's economy published October 19. "During the second half of 2015, GDP is expected to decline at a slower pace than in the first half of the year, with GDP for the entire year 2015 expected to fall by about 11%," the report concluded.

The Ukrainian Ministry of Economic Development and Trade announced earlier that the country's real GDP dropped by 16.3% in January-June. Industrial output fell  5.1% y/y and increased 5.9% m/m in September, the State Statistics Service of Ukraine (Ukrstat) reported on October 19.

IMF deal shows strains

However, despite of Lagarde's recent positive remarks on the latest developments in Ukraine's economy, the IMF and the country's government cannot agree on the next due transfers of financial support from the multinational lender.

On October 16, Ukrainian Finance Minister Natalie Jaresko said the next IMF mission is expected to come to Kyiv for the second review of the EFF and for the disbursement of the third tranche worth $1.7bn after the local elections scheduled for October 25.

Jaresko said the Ukrainian government and the previous IMF mission, which visited Kyiv in September and early October, failed to agree on details of tax reform.

The minister added that further assistance of $2.3bn from other international donors (Eurobond issue under the US guarantees worth $1bn, a $670mn tranche of macro-financial assistance from the European Union, and a $300mn from Japan) is tied to this IMF tranche.

Analysts said the sides now appear to be pulling in different directions at crucial points in the delivery of the loans.

"Ukraine was on track to receive $3.3bn in two IMF wires by the year end, according to the initial schedule," Alexander Paraschiy at Kyiv-based Concorde Capital said in a note to clients. "The government’s stalled negotiations with the Fund have undermined this plan, throwing into question its $18.3bn target on gross international reserves accumulation."

Ukraine's international reserves increased by 1.2% ($157mn) to $12.8bn in September, the National Bank of Ukraine (NBU) reported on October 6.

Mind the numbers

Meanwhile, the exact definition of Ukraine's economic recovery is debatable, says Aleksei Blinov, chief economist at Alfa-Bank Ukraine. "In the coming months we will hear more and more about how the economy is getting better and growth is starting in Ukraine," says Blinov.

"Currently Ukraine's economy is indeed exiting a deep recession, but to understand what is happening you need to understand how economic statistics work in order to not fall victim to deceptive figures," says Blinov, who equates talk of growth in Ukraine to "comparing a pit with an abyss".

"It is true that production in many branches is gradually reviving. For instance, September's results show that metallurgic production increased by 5-10% across different product groups compared to August, which in the pre-crisis times was a very rare event. Year-on year-growth metallurgy in September ranged between 13% and 33%," says Blinov.

"But if you look at the absolute production figures, you get a completely different picture. The volumes of steel and rolled steel production in September are still lower than the figures for May 2015," says Blinov.

On the whole, the Ukrainian economy continues to contract by comparison to the disastrous results of one year ago, the analyst notes. "You can't refer to the slowing of an economic contraction as 'economic growth' without blushing."

"Taking into account the peculiarities of industrial statistics, compared to the halting of production due to the war, the 1-3% growth forecast by a number of organisations for 2016 in fact means stagnation," concludes Blinov.

Sombre outlook on growth

Deceptive statistical effects are also hazardous for recovery because they may prompt calls for higher state spending based on the mistaken belief that sustainable growth in Ukraine has restarted.

But the long-term outlook for Ukraine is also far from rosy, with a consensus growth estimate of only 2% for 2016, far removed from rebound growth and considerably lower even than 4% growth rates seen after the global credit crunch crisis of 2008-2009.

According to analysts at Investment Capital Ukraine - founded by the current head of NBU Valeriya Gontareva - Ukraine's economy faces stagnation rather than rebound growth in the coming years.

"Ukraine's economic potential growth rate has declined over the past few years because of chronic underinvestment. a low level of fixed investments in relation to GDP, which put a kind a natural restraint on the future growth of domestic output," argues Oleksandr Valchysen, an economist at Investment Capital Ukraine. "As a result, annual growth in coming years will not exceed 2%."

Business remains badly rattled by the Russian annexation of Ukraine's Crimean peninsula and Moscow's support for a pro-Russian insurgency in East Ukraine's Donbas region. "As risk of further escalation was kept high, private businesses have been on alert over their operations and were cutting back. This behaviour will be difficult to reverse and moreover to streamline into a business boom," Valchysen believes.

"We believe that everything will happen more slowly than does the International Monetary Fund [forecast of 2% for 2016]," Merril Lynch analyst Vadim Khramov said at a recent investment forum in Odesa. "We don't anticipate the economy rebounding, industry in the east is ruined and it will take a long time to revive it," he added.

Long-distance shot

The US-based investment company SigmaBleyzer is one of the few to venture a long-term growth outlook for Ukraine, a bold move considering the number of unknowns like the real level of public debt and non-performing loans, political fallout from harsh austerity measures, and Russian policy towards Ukraine.

But if all goes well, and Kyiv stays the reform course, SigmaBleyzer chief economist Oleg Ustenko sees growth in Ukraine accelerating to 4% by 2018. "Depending on the success of the Free Trade Area with the EU and with major improvements in the business environment, Ukraine's GDP growth could even increase to around 6-8% by 2020," Ustenko believes.

Dollars yielding to hryvnia

Meanwhile, the population has signalled growing faith in the economy through increasing sales of dollars snapped up during previous months. After tanking during the worst of the crisis, the Ukrainian hryvnia has is now stable and even slightly appreciating at UAH21.5 to the dollar.

Ordinary Ukrainians almost crashed the economy several times in the last two years when the central bank was forced to sell billions of dollars a month from its dwindling reserves to a panicky population. At the peak of the buying rush, the population was buying up to $2bn a month against the NBU former reserves of about $35bn.

The NBU was forced to place limits on withdrawals and mandatory hard currency surrender requirements on exporters to prevent a systemic meltdown. But as the situation calms, many of these measures are now being withdrawn.

The volume of currency sales has fallen dramatically this year. In September, the regulator bought $152mn, of which $144mn was acquired at FX auctions and now the population is a net seller of dollars: net FX sales totalling $167mn in September, according to the NBU data.