Page 6 - UKRRptNov19

1.0 Executive summary
Ukraine’s economy is coming on very nicely. Growth is still sub-par but the economy is growing at about 3% andits still early days as the government is only two months into the job.
But before diving into the economics the whole story still turns on the politics and that is also improving. The main issue for investors is what is the relationship between Ukrainian president Volodymyr Zelenskiy and the uber oligarch Ihor Kolomoisky?
After fudging the question at his marathon press conference at the start of October with a “I don't know, leave it to the courts” the International Monetary Fund (IMF) promptly froze its negotiations on a new Extended Fund Facility (EFF). That spurred new comments from the head of the presidential administration who came out with a crystal clear: “Even if the court rules to give the Privatbank to Kolomoisky, we won’t let it happen.” These comments were repeated by Ukrainian Prime Minister Oleksiy Honcharuk in the last days of October. They will probably be enough to assure investors fears and allow for a new IMF deal by year end. That is a prerequisite for a lot more international aid money and will also reduce the prices on the international bond markets all of which is necessary to get Ukraine through the next few years.
Growth this year will end the year at about 3% says Ukrainian Finance Minister Oksana Markarova, in line with the IMF predictions. However, after that opinions divide and underscore the uncertainty of how Zelenskiy administration will go. The IMF just brought out its medium term predictions and says Ukraine will continue to grow at about 3% fro the next three years, whereas the government wants to lift growth to 7% over that period.
More interestingly the IMF says this year’s growth will come in at 2.99%, which is just below the level needed to trigger the warrant payments (3%), although even if the warrants are triggered this year no payments are due for two years and even then they will amount to few tens of millions of dollars at this level of growth. The warrants only become expensive with growth over 4% and 7% would mean that the government has to payout some 1% of GDP to investors, but a deal is expected before it gets to that level.
The National Bank of Ukraine (NBU) also revised its 2020 economic growth forecast to 3.2% y/y from 2.9%. The revisions were attributed to "stronger domestic demand, more favourable terms of trade and expectations of a larger harvest of grain crops".
And the growth drivers are starting to move into place.Real wages in Ukraine grew 9.8% y/y in September, accelerating from 7.7% y/y growth in August, the State Statistics Service reported on October 28. The average monthly nominal wage amounted to UAH10,687 a month ($431), increasing from UAH10,527 in August, or 0.7% m/m in real terms.
That is feeding through into retail turnover and that is a source of money for everyone; the Russian boom years were driven by consumer spending on the back of 10% per year wage hikes as the government sought to close the gap between the public and the private sectors and it looks like Ukraine may attempt the same thing.
Even more encouraging construction soared by 20% in September, which is the second of the three big growth drivers. (Investment is the third and that is still under performing.) Construction and rising income levels are obviously linked.
After struggling to contain inflation last year, the inflation rate is now falling steadily and slowed to 7.7% in September from 8.8% in August. That lead the National Bank of Ukraine (NBU) to slash a massive 100bp off interest
6 UKRAINE Country Report November 2019 www.intellinews.com