An island of stability — but for how long?

UKRAINE - Report 22 May 2020 by Vladimir Dubrovskiy and Dmytro Boyarchuk

Ukraine is going through something quite unusual: its economy remains an island of stability, in the midst of the global COVID-19 storm. Most likely the big blow is still ahead. However, right now the balance of trade is improving, on the back of strong demand for food exports, the currency is strengthening again, inflation is slowing, and fiscal accounts are still in relatively good shape. The minor impact of the first months of the pandemic has even encouraged the NBU to outline a fairly optimistic forecast, with a narrowing CAD, no currency shock and a relatively modest 5% drop in the GDP in 2020. The future is uncertain, and we remain cautious about being overly optimistic, but the current metrics do provide quite a cheering story.

Positive signals from the IMF also had a positive impact on sentiment. As expected, President Volodymyr Zelenskiy pushed the “anti-Kolomoyskiy” bill through the Rada, which is supposed to prevent the return of the nationalized Privatbank to its former owners Ihor Kolomoyskiy and Ghennadiy Bohlyubov—or, for that matter, to any other commercial bank that went bankrupt. That was the final directive on the IMF to-do list. Land reform was approved. The revised 2020 budget with a deficit of 7% of GDP was positively evaluated by the IMF officials. In addition, the Office of the President has stepped back from an initiative to dismiss Artem Sytnyk, director of the National Anti-Corruption Bureau (NABU).

On May 21st, the IMF informed about a staff-level agreement for a new 18-month Stand-By Arrangement.

By April, macro-statistics worsened, but are still better than might have been expected, given the dramatic developments in leading economies. Industry plunged by 16.2% y/y in April. Retail sales fell 11.6% y/y. Consumer inflation was a modest +2.1% y/y in April, as the national currency strengthened and hydrocarbon prices dropped. Central budget collections shrank 7.1% y/y in April on the back of falling imports, but the fiscal balance was reported as a surplus. The CAD is narrowing amid stable food exports and sliding imports. Preliminary April data shows a trade surplus, which is very unusual for this season.

The hryvnia is reflecting positive external accounts dynamics. Since March, the national currency has strengthened by 5.4%, to UAH 26.78/USD by the time of this writing. It’s not clear how sustainable this appreciation might be. If we see lower demand for Ukrainian non-food exports and a revival of imports, depreciation will likely also resume.

The NBU slashed the prime rate by 200 basis points, to 8%, and promises to cut to 7% soon. Low inflation and a stabilized FX market are encouraging monetary authorities to make further rate cuts. However, such lower rates are not supported by extra liquidity in the market.

Gross international reserves grew by 3.1% or $0.8 billion in April, reaching $25.7 billion, or 4.5 months of imports.

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