Squeaking by, without IMF money
With few notable events in April, we decided to take a closer look at what might happen if the IMF deal were delayed until after the 2019 elections—although we remain hopeful that cooperation will resume in 2018.
Two important dates are coming up in the next two years: a presidential election that should be scheduled for March 31, 2019, and Verkhovna Rada elections that should take place in October 2019. Will Ukraine have enough foreign cash to pass those two milestones smoothly, without IMF help? Our projections show that while there are risks, they are manageable. If the IMF stays away, gross international reserves will fall to around $10 billion by the end of 2019, beyond which everything will depend on how quickly a new Cabinet is sworn in after the October VR election.
It’s hard to know what President Petro Poroshenko will do, but there are at least three arguments for why he might do without the IMF. First, delaying a hike in gas rates and stalling the anti-corruption court will improve his re-election chances. Second, even if reserves decline, that won’t lead to an immediate default, or even to a sharp decline in the hryvnia. Third, if someone else is elected president, such as Yulia Tymoshenko, that person will have a hard start, with slim gross reserves, huge external payments looming in 2020, and Gazprom cutting its transit shipments through Ukraine.
Ukraine’s economy is recovering steadily. The hryvnia was stable through April, at nearly UAH 26/dollar. The seasonal narrowing of CAD over the summer should keep the hryvnia close to this level until September. Industry slowed to +1% y/y, from +1.9% y/y in February and +3.6% y/y in January, led by a drop in metal production. But the decline in metal production is likely temporary, as external markets remain favorable. Retail trade accelerated to +7.6% y/y from +5.6% y/y in March, on the back of real income growth of +9.5% y/y and an increase in household loans of +11.2% y/y. Consumer prices again inched up to +1.1% m/m (+13.2% y/y) vs. +0.9% m/m (+14% y/y) in February, driven by surge in prices for clothing and footwear. The NBU left the prime rate unchanged at 17% in anticipation of an easing of inflation with the new harvest. Budget revenues surged 30.2% y/y in March as corporate profit tax collections quintupled. Fiscal prospects are positive for 2018. We are keeping our CAD forecast unchanged at $2.6 billion CAD, or 2.1% of GDP.
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