Double Trouble: A Trump Surprise, and IMF Lending on Hold
The Ukrainian authorities, like the rest of the world, were caught by surprise by the election of Donald Trump. The Poroshenko administration had never approached the Trump camp before the election, believing that Hillary Clinton would be the victor. Now Poroshenko needs to not only build relations with the new U.S. administration, but also to persuade Ukrainians that the apparently Russia-friendly president-elect is not the utter disaster he and the Ukrainian media have suggested. In U.S. foreign policy priorities over the coming four years, the issue most critical to Ukrainians, the armed conflict between Russia and Ukraine, will apparently not be among Trump’s priorities.
The IMF mission left Kyiv on November 18th, after a two-week official visit. The IMF’s press release was critical, with no signs of a potential loan soon. The two benchmarks outlined in the Memorandum as priorities -- the law on agricultural land circulation and the strengthening of utility-related social assistance programs -- have been ignored by Ukrainian authorities. Moreover, the authorities have proposed doubling the minimum wage in 2017. It’s hard understand how IMF funds might be unlocked for 2017.
The economy is maintaining modestly positive though extremely volatile growth. Industrial output slowed in October to 0.8% y/y, from +2.0% y/y in September. Yearend industry may see even less than 2.0% y/y growth. Retail trade has also slowed, to 0.9% y/y from +4.1% y/y in September, reflecting weak internal consumption, as we project +3.3% y/y private consumption growth for 2016.
In October consumer inflation hit 2.8% m/m (+9.4% ytd for October 2016) on the back of a hike in heating tariffs. By the end of 2016 we expect CPI to increase 11.6% ytd (+15.4% y/y). The general budget’s revenues jumped 30.5% y/y in October (+14.1% y/y for 10m 2016), helping reaffirm Ukraine’s sound fiscal standing. The Finance Ministry will easily meet its 2016 revenue target. The CAD narrowed in October, dropping to $234 million from $875 million in September. No-coupon payments for Eurobonds (with $505.4 million being paid in September) were primarily responsible. The trade deficit remains high ($546 million vs. $603 million in September). We expect the CAD to be $3.8 billion (4.3% of GDP) in 2016. Gross international reserves were reported at $15.3 billion at the end of November. Scarce financial inflows are responsible for low reserves. There is still a chance for a EUR 600 million loan from the EU in December. The hryvnia was a bit volatile in November, amid minor and largely discredited (i.e., paid for) street protests. But the currency is basically stable.
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