Economically everything in Ukraine is going swimmingly, except perhaps inflation is a bit too high and wages are a bit too low. However, politically Ukraine had a very tough September that saw all the enthusiasm for Ukrainian president Volodymyr Zelenskiy evaporate.
The good news is the economy continues to recover and is actually growing faster than anyone expected having turned into a 4.6% growth in the second quarter of this year. The official government target for the year is 3% growth, but the Prime Minister has called for 7% in the near term and everyone expects growth this year to surprise on the upside compared to the conservative official forecast, that is due to be updated in the autumn anyway.
The main fly in the ointment in the macro picture is persistently high inflation, although here too there was improvement. The money inflation in August was only 0.3% as the summer season depressed food prices as it does every year and annual core inflation slowed from 7.4% to 7.2%.
The National Bank of Ukraine (NBU) cut rates in September by 50bp points to 16.5% leading Ukraine with one of the highest real interest rates in the world, but that is seen as a good thing as the central bank prioritises the fight against inflation over boosting growth and maintains its independence. More cuts are expected in the new year.
And gross international reserves (GIR) have risen to some $22bn which is just over three months of import cover which is enough to ensure the stability of the hryvnia - another important factor in ensuring the recover continues.
Ukraine was already rewarded with a ratings upgrade by Fitch in February and got another one in September when international ratings agency Standard & Poor’s (S&P) upgraded the sovereign rating to B+.
The debt profile of Ukraine continues to improve as the debt to GDP continues to fall fast and is current at around 47% of GDP – a modest level. The Ministry of Finance has nearly finished is borrowing programme for the year as foreign investors piled into the local bond market, but after some $500mn of local bond issues in August the demand dropped off to next to nothing in September. This is partly due to the ministry offer longer maturity bonds, partly due to squeezing the yields lower, but also partly due to political risk fears surfacing.
The politics are confused now. On the one hand Zelenskiy has launched an ambitious reform programme and has been ramming law after law through the Verkhovna Rada. Immunity has already been withdrawn for Rada deputies exposing them to prosecution for corruption. And the anti-corruption court (ACC) has started working completing the anticorruption triumvirate: NABU is the investigative part of a triumvirate that also includes the Special Anti-Corruption Prosecutor’s Office (SAPO), which carries out the prosecutions in parallel to the General Prosecutor’s Office, but is also entirely independent from the government’s control. And now the ACC is there to hear the cases.
Next up this autumn is a set of laws to create a land market that will add 2% to GDP growth and bring in a windfall of circa $2bn in the first year, say experts. Altogether there are some 500 reformist laws on the docket.
The fly in the ointment here is the relationship between Zelenskiy and oligarch Ihor Kolomoisky. The house of former NBU governor Valeriya Gontareva was burnt down in an arson attack in September at the end of a string of attacks on her and her family. Gontareva is responsible for nationalising Kolomoisky’s bank in 2016.
Kolomoisky has been trying to get his bank back, or at least $2bn in compensation. Moreover, bne IntelliNews sources say there is a raft of measures that will benefit Kolomoisky in the works in each of the many sectors he is active in.
It could well be that Zelenskiy is a genuine reformer, but the price of these reforms is he will protect and enrich his benefactor Kolomoisky.
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