Wealth Shock
New electronic statements, or “e-declarations,” revealing the impressive wealth amassed by Ukraine’s politicians and civil servants dominated the headlines in October. Some observers were shocked to see the millions of dollars of previously opaque wealth reported publicly for the first time. The fact that Ukrainian elites, including top Central Bank managers, do not trust the national currency (and keep their savings in dollars) or the banking system (and keep their savings in cash), was another reveal. It’s safe to say that political life will never be the same. One can only hope that this time change will be permanent.
After the IMF approved its third loan wire for Ukraine in mid-September, things appeared to be looking up. But the mood darkened, following the release of the memorandum: ambitious structural benchmarks made it clear that the next wire from the Fund will be much further down the road.
Ukrainian economic numbers are still largely positive, but volatile. In September, industry grew 2% y/y, a slower pace than the +3.4% y/y in the previous month (+2% y/y for 9m 2016). Retail trade added +4.1% y/y (+5.2% y/y in August), up 3.9% y/y for 9m 2016. CPI was again growing.
Fiscal accounts are still in good shape, with general budget revenues increasing 6.8% y/y in September. State collections grew 12.3% y/y for 9m 2016, notable in that it was done without the receipt of any dividends from the Central Bank. Given that in October the first wire of Bank dividends had been arranged (UAH 10 billion out of the UAH 38 billion budgeted for the year), we expect revenues to somewhat exceed the yearend target.
The CAD sharply expanded in September, to $875 million on the back of Eurobond coupon payments. While this was in line with our estimates, we expect some change in external accounts. The pickup in iron ore and metal prices might strengthen proceeds from exports, and narrow the CAD. Still, in light of the extreme volatility of economic tendencies, we are maintaining our CAD projection, at $3.8 billion (4.3% of GDP) for 2016. Gross international reserves increased to $15.6 billion in September. The placement of Eurobonds ($1 billion) under U.S. government guarantees and a $1 billion loan from the IMF were primarily responsible for reserve growth. Since only a EUR 600 million loan (from the EU) is anticipated to arrive over the upcoming months, we do not expect another significant jump in gross international reserves until yearend. The hryvnia strengthened in October, gaining 1.7% in value. We expect it to weaken to closer to 27 by yearend.
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