Page 5 - UKRRptJun20
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Half the loans in the banking sector are non-performing, but again the work done by the NBU to clean up the sector since 2016 has paid off as all that bad debt is now provisioned and so does not pose an existential threat to the system.
The country was also facing default on its international loan obligations as it is unable to finance its increasingly heavy debt repayment schedule this year without International Financial Institution (IFI) help, but a new $5bn Stand By Agreement (SBA) with the International Monetary Fund (IMF) was signed at the last minute and should solve that problem too.
The main impact is this is a crisis that Zelenskiy could have well done without. The country is still on its back and the economy was only just starting to recover from an almost total collapse in 2015. Ukraine badly needed some peace and quiet to build up some economic momentum and start attracting international investment as it starts on a long path towards sustainable recovery. That has now been delayed for at least a year, and probably longer. A carefully crafted budget with a modest 2% of GDP deficit has been abandoned as the state loosens the spending spigot to try and absorb some of these economic shocks.
That is money gone on economic stimulus that is badly needed for investment.
So far the worst damage has not been recorded in the statistics. The drop in GDP in the first quarter was only 1.2%, but that will skyrocket in the second quarter to something like a 6% fall. As a harbinger of what is to come, industrial production tanked in April, falling by 16.2% year-on-year, down from the 7.7% contraction in March. Manufacturing was worst hit, down by more than 20%.
While this looks bad, as an emerging market with relatively little debt at the state, corporate and personal levels, these markets tend to bounce back relatively fast and the economy can be expected to recover fairly strongly in the second half of this year before returning to modest growth next year.
The government is forecasting a contraction of 4.8% this year (with a 10.9% contraction in the second quarter alone) but the EBRD believes growth will bounce back to a 5% growth in 2021, which many other analysts agree with.
The slowdown will hurt the most vulnerable the most and real incomes, that have been growing recently, will contract again while unemployment has already added some half a million names to the dole queue in the last two months.
To shorten this process as much as possible the government, like many others, has already started to lift restrictions in the last week of May in hope to reviving business and preventing those with thin working capital from going bust entirely.
All-in-all it is going to be a very difficult year, but the government has coped well so far and looks like it will muddle through to the end of the year without a big disaster.
Politically this has cost Zelenskiy some of his popularity and he has
5 UKRAINE Country Report June 2020 www.intellinews.com
