An attack, new money, and a strangely strong Hryvnia
The IMF Executive Board has added Ukraine to its agenda for a December 18th meeting. Since the government has done all of its homework, expectations are positive. The only uncertainty is the size of the next tranche. The EU has already wired €500 million under its new Macro Financial Assistance program, so no one expects any surprises from the Fund.
Despite IMF developments, the main news in recent weeks has been the crisis over the Azov Sea. Russian border patrol cutters fired at and took over three Ukrainian naval vessels in the Black Sea, and took 24 seamen prisoner. President Petro Poroshenko called for martial law, which was introduced in 10 oblasts. The international community recognized this as a first case in which Russian forces openly attacked Ukrainian military units. U.S. President Trump canceled a meeting with Russian President Vladimir Putin at the G20 economic summit, referring to Russia’s aggression in the Black Sea.
The international community referred to the incident as a “crisis,” though it was nothing new for Ukraine, which has been subject to a hybrid war by Russia for over four years now. Some believe introducing martial law was an overreaction, since the Ukrainian Army has faced daily casualties on the Eastern front, and even argued that it was part of a political election agenda in Ukraine, something the Kremlin tried to play up, too. But, this being the first open act of war from Russia, the decision was accepted by the Verkhovna Rada and modified to cover only 10 oblasts for 30 days, to avoid affecting the scheduled presidential election in March. Most business commentators don’t expect martial law to have much impact.
Industry picked up by 1.4% y/y in October, vs. -1.3% y/y in the September. Stronger mining growth, of +5.2% y/y, was the main driver of improvement. Retail trade slowed to +4.6% y/y in October vs. +6.6% y/y in September. However, real incomes and retail loans keep growing strongly. Consumer inflation grew 1.4% m/m in November on the back of rising food prices, and a 23.5% increase in residential natural gas rates. Budget revenues grew 15.6% y/y by October, only slightly below target. Still, payroll collections, including Pension Fund revenues, remain a problem: the Verkhovna Rada allocated UAH 10.7 billion to cover the extra pension fund shortfall.
The hryvnia is strengthening, having gained 1.3% since the end of October, despite a rapidly expanding trade deficit. By October, the CAD reached $4.57 billion, or 3.6% of GDP, though we’d expected it to be less than $3 billion. This fast deficit growth should translate into depreciation. Official statistics show that trade credits are balancing the growing trade gap. This trend to a stronger hryvnia is not sustainable, however, and we expect the currency to resume depreciating soon.
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