Ukraine Country Report Apr19 - April, 2019

April 1, 2019

The month of March was taken up with campaigning for the presidential elections to be held on March 31, which were far to close to call but will almost certainly end with a run off to be held in April.

The outstanding feature of the vote is not the appearance of outsider and comic Volodymyr Zelenskiy as a clear front runner and obvious protest vote candidate, but the deep mistrust the population have shown in the political elite by supporting him.

Recent polls have found that only 9% of the population trust the government, the lowest level of trust in the world, and 80% of the population believe the vote will be fixed.

Ukraine finds itself in a tough place. The turn to the EU was a break with the past, but the destruction that the divorce with Russia wrecked on the economy has not been replaced by new closer ties with the EU. The Deep and Comprehensive Free Trade Area (DCFTA) has seen trade with the EU grow quickly, but the limited no-duty quotas remains so small that the EU is unable to make up for the trade lost with Russia. Moreover, Ukraine is running a sizeable $4bn trade deficit with both the EU and Russia.

Labour issues are also causing concern as an estimated fifth of the Ukrainian work force has left for jobs in the EU – up to 2mn Ukrainians are now working in Poland – where wages are up to four times higher. There are also fears that Germany, which is suffering from its own labour shortage, may make work permits available to Ukrainians that would deplete both the Ukrainian labour market further as well as draining Central Europe of badly needed cheap labour.

And the reform process continues to advance but slowly. The banking sector, for example, is back in profit however, sectorial average non-performing loans (NLPs) are just over 50% and have been there for several years. There is progress but it is going slowly.

Economic growth is back in the black and Ukraine turned in 3% of growth last year, but this year growth is expected to slow somewhat to around 2.9%.

Prime Minister Volodymyr Groysman said in March: "This year we are working so that in 2019 the economy would grow steadily more than 3%. We will continue to do major repairs to the country, invest resources in roads, infrastructure, and build social infrastructure facilities."

According to official data, the nation's GDP grew 3.4% y/y in October-December, or 1.1% quarter-on-quarter seasonally adjusted, accelerating from 2.8% y/y (0.4% q/q) in the third quarter of 2018.
But the International Monetary Fund (IMF) revised downwards its GDP growth forecast for 2020 from 3.4% y/y to 3% y/y. The growth forecast for 2019 remained unchanged at 2.7%.

The other major issue Ukraine faces this year is the maturing of restructured debt that is starting to come due. Ukraine has some $15bn to repay in 2019 and $20bn in 2020. Meeting these bills or refinancing them is going to be very hard unless the IMF programme stays on track. Under the new Stand by agreement (SBA) with the IMF the fund will disburse $3.8bn this year but Ukraine will still need to raise $4bn-$6bn from the international capital markets and another $2bn-$4bn from the domestic market.

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