Gates of the unknown open wide

UKRAINE - Report 15 May 2019 by Dmytro Boyarchuk and Vladimir Dubrovskiy

Three weeks have passed since the name of the sixth president of Ukraine was confirmed. But neither key appointments nor the first steps of the new administration have been announced. President-elect Volodymyr Zelenskiy’s advisors are busily making comments, but none of these speakers have official appointments -- so such statements are, at this stage, little more than personal views. This state of affairs has generated a broad space for conspiracy theories to flourish. Over the last few weeks, it’s been possible to read a wide spectrum of potential scenarios, based mainly on the imaginations of the authors. Meanwhile, Zelenskiy seems in no hurry to dot the i’s and cross the t’s.

The main debate is over the date of Zelenskiy’s inauguration. If it takes place before May 27th, the president-elect will be in a position to call a snap Verkhovna Rada election. It’s not clear what he might gain from such a move, given that regular elections are already set for the end of October. But pundits claim that Zelenskiy should be willing to do this, postulating that if elections take place a months earlier, the president will win a larger faction in the legislature (although he currently has no real party anyway). Zelenskiy himself has said nothing about his intentions, although he has been understandably vociferous about the foot-dragging over setting his inauguration date.

Though uncertainty continues to dominate, good macroeconomic fundamentals are keeping economic players relatively calm. Ukraine’s economy is growing, the hryvnia is strengthening and the IMF has been sending positive signals. Global gas prices have fallen, and now Ukraine’s household gas rates are at market levels. The next IMF review is coming up soon.

Industrial output recovered by 2.1% y/y in March, after a three month decline. Industry was still in the red, at -0.9% y/y, but stronger growth in the European Union and the United States offers a chance for domestic exporting industries to catch up by the end of the year. Consumption remains robust: retail sales keep soaring, at +9.5% y/y in March, on the back of strong remittances, double-digit growth in real wages and a recovery in consumer lending.

Consumer inflation picked up slightly, to 1% m/m, and +8.8% y/y in April, driven by stronger growth in food prices. The CPI easing that started the year has already been fully offset by food prices. Inflationary tendencies have returned to the trajectory we initially outlined: +6.3% ytd, and +8.4% y/y for 2019.

Budget collections are showing a disturbing trend. In March, general budget revenue growth eased to +5.3% y/y, from +23.7% y/y in February. In April, central budget revenues looked robust, at +18.2% y/y, solely due to a hefty wire of dividends from the NBU, of UAH 47.6 billion. Net of the NBU money, central budget revenues grew only 6.7% y/y, far below the target level. In part, this disappointing trend is pushed by a temporary decline in petrol imports; collections could recover somewhat as imports rebound. But we haven’t seen such poor budget revenue performance for three years.

External accounts improved on the back of the decline in petrol imports, and lower interest payments. By March, the CAD was reported at $422 million, down from a $525 million deficit a year ago. Russia’s “oil maneuver” against Belarus is seen as the main reason for the temporary import decline. Gross reserves remain high, at $20.5 billion, or 3.4 months of imports by the end of April.

The hryvnia keeps strengthening, gaining 2.6% in April. The improving CAD and strong demand for state bonds from nonresidents are keeping the currency strong. Both factors look temporary, though, and the outlook is bearish.

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