IMF arrives, as election prospects turn murky
The IMF remains the key to many issues in Ukraine. News of the September 6th arrival of its mission signaled that a deal had been reached with Ukrainian authorities. On August 29th, however, the Cabinet extended existing residential gas rates for another month, which confused observers. We remain optimistic that a deal will be struck with the Fund, since Premier Volodymyr Groysman has little room for maneuver, with the hryvnia moving into creeping depreciation. But with elections around the corner, we can’t rule out surprises entirely.
Public sentiment is very gloomy. Polls show that Ukrainians see few improvements in their lives: people say they are disappointed in politicians, and tired of both war and reforms. Ukraine’s Army is the most trusted institution in the country, though, with 62% of the public supporting it. Indeed, Ukrainians respect the Army even more than they do the church, which has 57% support. Among parties, Yulia Tymoshenko’s Batkivshchyna leads in the polls. But she is reaching the ceiling in voter potential, as she is largely seen as cooperating with the aggressor, Russia.
The hryvnia fell an additional 4.9% in August, to UAH 28.35/USD by September 1st. A surge in imports was the main reason: importers appear to have decided to hedge their currency risks, and began bringing in more goods in advance.
Industrial output picked up to +2.9% y/y in July, from +2.2% y/y in June, on the back of stronger metal output. Organized retail trade also strengthened, to +6.4% y/y vs. +5.8% y/y in June. Inflation continues to slow, with the CPI flat in August. For August, consumer inflation slowed to 3.6% ytd vs. +8.1% a year ago.
Despite easing inflation, the NBU raised the prime rate once more, by 0.5ppt, to 18%. The NBU Board is concerned about capital flight from emerging markets, and domestic risks connected to the upcoming election season. Interest rates are rising accordingly.
General budget revenues increased to 19.1% y/y, and promise to meet the target for the year. But payroll contributions keep underperforming, with a 27.5% y/y increase for July, vs. a 35% y/y growth target. Unless collections pick up, we could see an unplanned deficit of UAH 10-15 billion, or 0.3%-0.4% of GDP in the Pension Fund this year.
The CAD surged to $1.1 billion in July, vs. $401 million a year ago. A sharp expansion in the trade deficit, to $1.7 billion in July, from $1.1 billion a year ago, on the back of an import surge, was the main reason. July CAD outstripped all optimistic projections, and raised the risk that the CAD might exceed $3 billion, or 2.4% of GDP in 2018. Our initial projection was $2.6 billion CAD or 2.1% of GDP.
Now read on...
Register to sample a report