Election fever, with Zelenskiy ahead; Hryvnia strong

UKRAINE - Report 13 Mar 2019 by Dmytro Boyarchuk and Vladimir Dubrovskiy

Election madness reigns in Ukraine, with nearly every day bringing a new shocking headline. The Constitutional Court has dropped the “illicit enrichment” provision; a defense procurements scandal has blown up; a decree raising natural gas rates has been rescinded -- and more.

Against this wild backdrop, comedian Volodymyr Zelenskiy had widened his lead to 26.4% by mid-February, with President Petro Poroshenko’s poll numbers rising to 18%, and Yulia Tymoshenko’s slipping further behind, to 13.8%. Corruption scandals and questionable political decisions have only added to Zelenskiy’s appeal as a “new” face in politics. Two second-tier candidates, ex-Defense Minister Anatoliy Hrytsenko, with 6.4%, and Lviv Mayor Andriy Sadoviy, with 2.4%, decided to join forces (in favor of Hrytsenko), but it looks as though they lack enough support to challenge the three front runners.

The Constitutional Court caused serious shock waves when it decided to cancel the “illicit enrichment” provision in the Criminal Code. This move effectively destroyed all anti-corruption efforts of the National Anti-Corruption Bureau (NABU) of the last few years. According to the agency, 65 top-level corruption cases had to be closed as a result. Poroshenko immediately promised to submit a new bill, to correct this mistake. But legislation cannot work retroactively, which means that all previously filed cases will be beyond the reach of any new law.

The hryvnia is on an appreciating trajectory. In February, the national currency rose 3.3%. A decline in natural gas imports over the last months, coupled with non-resident demand for local state bonds, is driving this trend.

Inflation eased to +0.5% m/m or +8.8% y/y in February, from +1.0% m/m or +9.2% y/y in January. Slower food price growth, down to +0.9% m/m vs +2.1% m/m January, is behind the decline in consumer inflation.

Industrial output fell 3.3% y/y in January, contracting for the third month in a row. In January, all core sectors showed decline except utilities. Food processing is expected to recover, but overall industrial growth is under a question mark in 2019.

By contrast, organized retail trade continued its upward trend, posting +7% y/y in January. Soaring remittances as well as growing real wages, under pressure from labor migration, are underpinning consumption growth.

Budget collections were reported as poor in January, up only +3.6% y/y for the general budget, with VAT revenues almost flat y/y. This signal is disturbing, but it was for only one month, and already provisional data suggests substantial improvement in February, up to +24.9% y/y for central budget collections.

Current accounts were in the black in January, with a dramatic $446 million surplus vs. a $344 million deficit in December. The narrower trade deficit, on the back of a nearly 75% plunge in gas imports—down to 0.2 bcm vs 0.8 bcm a year ago— was behind this improvement. Gross international reserves dropped by 2.9% m/m to $20.2 billion by March 1st, due to scheduled repayments.

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