The Worst is Over
Things in Ukraine keep looking up. Ukrainian singer Jamala’s victory at the Eurovision 2016 international song contest, Nadiya Savchenko’s release from a Russian jail cell, and dozens of other pieces of positive news have all helped boost public morale. After two years of hardship, Ukrainians are still afraid to believe that the worst has passed -- but the recent stream of encouraging news leaves less and less room for pessimism.
The appointment of Yuriy Lutsenko as general prosecutor is one encouraging development, in our view. The decision to change the law specifically for one person (now a person who lacks a legal education can become the general prosecutor, whereas before, only those with the proper educational credentials qualified) is fraught with questions and potential issues. But we must admit that Lutsenko is much better at the job than all of his predecessors. His first move in office was to dismiss all of the deputy general prosecutors, who have rather dubious reputations -- which at least proves that he’s not the disaster his critics warned he would be.
The importance of the new judicial reforms can hardly be overestimated. The changes made to the Constitution to carry out these important and long-awaited reforms show that the authorities are really serious about changing the system. The reforms aim to eliminate political influence over the judicial system, to significantly raise judges’ salaries, to arrange for the hiring of judges based on open competitions, to narrow judges’ immunity rights, and to require transparency in the incomes of judges’ families. These are but a few of the changes in store. Clearly such changes will take years to implement, amid the incredible resistance being mounted by the judges entrenched in the old system.
Ukraine’s dialogue with the IMF and other donors also is also moving in the right direction. Apart from the IMF, which is expected to make a decision on Ukraine in July, the U.S. government has granted Ukraine state guarantees for $1 billion Eurobonds in early June. These developments lead us to the following two conclusions: a) the authorities are making the right steps (voting for judicial reform may have been a precondition for further funding), and b) Western donors are optimistic about the next IMF tranche reaching Ukraine.
The latest economic statistics are also encouraging. Industrial output increased 3.5% y/y in April, benefiting from increased metal production (+15.5% y/y). Organized retail trade maintained double-digit growth (+12.2% y/y), reflecting real wage growth (+7.6% y/y in April).
Budget revenues fell by 4.2% y/y, though this was largely due to absence of UAH 14.7 billion of temporary revenues available a year ago derived from the Central Bank’s profits; the proceeds from the sale of the 3-G licenses; and additional import duties. Falling revenues are disappointing at first glance, but recall that UAH 38 billion of the Central Bank’s profits are still being budgeted for this year. These funds will improve fiscal statistics when they reach state coffers.
External accounts improved in April, with a reported $327 million current account surplus, a considerable turnaround from the $460 million deficit from just a month before. A surge in food exports (+18.5% y/y) amid falling figures for metals (-17.5% y/y) is responsible for these developments. Given that metal and iron ore prices continue to slide, and that the recent hike in food exports looks like a one-off, we maintain our 2016 CAD forecast unchanged at $3.8 billion (4.5% of GDP).
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