Page 13 - UKRRptMar19

world, have undermined the business environment, and stalled inward investment. Ultimately these have stalled the pace of real GDP growth, recovery – while officials acclaim 3%+ real GDP growth, the truth is that the economy should be growing at a much higher pace, given the low base (4-5% at least), and this reflects the failure of the Poroshenko administration to address corruption in a meaningful way.
Q? But what about economic policy under Tymoshenko and Zelenskiy?
Answer: Well we simply don’t know that much about Zelenskiy’s economic programme as he does not seem to have an economic policy team – he has been talking about crowd sourcing policy, which really is a joke. That’s how the UK got the Brexit disaster. So if he wins he’d better learn fast, and get a decent team around him. He could, and he talks about being in favour of Ukraine’s Western orientation, so let’s hope. But my concern is that his experience means he will hire the wrong people, and under Zelenskiy we will see policy drift, policy error and time wasted, again. And Ukraine does not have this time.
Tymoshenko at least has a team, and the policy message has been more populist, albeit all the main candidates seem to agree on the idea of low taxes – talking about the exit capital tax hated by the IMF – holding energy prices low, and re-negotiating terms with the IMF, plus debt restructuring.
To be fair, the new IMF SBA is just a bridging loan, and I think the IMF would want to re-negotiate terms with whoever wins the presidential election and then the parliamentary elections. On energy prices, this would be a deal breaker with the IMF – but remember the Groysman team was equally populist in stalling agreed energy price hikes for 18 months from July 2018. And on debt restructuring, Tymoshenko seems to be talking about renegotiating the terms of the GDP warrants, which I think no one would object to, given their perverse initial structure, much to the benefit of bond holders.
Net-net, I think whoever wins the presidential election will have limited options on the policy front. Ukraine is not yet in a strong enough position in terms of public finances and external financing (FX reserve cover) to stand alone without the IMF. Indeed, without IMF financing for 2019-2020, it’s hard to see Ukraine being able to service its liabilities, unless global market conditions are set extremely fair. So all might make populist commentary in the run up to elections, but the hard reality is once in office they would have to play the IMF tune.
Perhaps the biggest issue with respect to the relationship with the IMF will be candidate’s plans for the NBU and the banking sector more generally. I think there is concern that Tymoshenko and Zelenskiy are backed by Kolomoisky and the price for that will be the return of Privatbank to former owners and then higher level personal changes at the NBU. In either case I think that will be a deal breaker for the IMF and official creditors, as banking sector reform including the nationalisation of Privatbank, and NBU reform (establishing and assuring its independence) have been amongst the biggest reform wins since independence. Returning Privatbank to its owners, after a cost of over 5% of GDP to the state in bailout costs, I think will/should be an anathema to the official creditors – and indeed, any new government will be required to recoup some/all of these bailout costs as a requirement of future cooperation with the IMF.
13 UKRAINE Country Report March 2019 www.intellinews.com