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All-in-all this would more or less cover the debt obligations for this year. But since the Smolii scandal all of this funding is in doubt now. The IMF warned that Ukraine maybe forced to pay off its debts using up to $10bn of its reserves taking the total down to $19bn – well below the three months of import cover needed to ensure the stability of the currency – which would spark a fresh currency crisis and a deep devaluation of the hryvnia or even a default on its international debt triggering a much deeper crisis.
On the economic front things were going a little better. The government has increased its spending plans which will lead to an IMF-approved 7.5% GDP deficit, up from the previous plan of 2.2%, which will be funded by borrowing.
IIF projects GDP to contract by roughly 9% q/q (sa) in 2Q20 before growing by 4.5% and 3.5% in 3Q20-4Q20, respectively. For the full year, this quarterly path results in a GDP contraction of 6.9%.
While Ukraine entered this crisis in a much-improved position, with higher reserves, a flexible exchange rate regime, credible central bank, and stable banking system, the economy will need that fiscal and monetary stimulus to recover from the COVID-19 shock.
Inflation has been crushed and down from over 60% in the 2015 economic collapse to 1.7% in May. The NBU followed through with another growth boosting whopping 200bp cut to the prime rate, bring interest rates down to 6% in June – the lowest level ever. And with a debt to GDP ratio of 40% the country’s fundamentals look solid.
The trade balance also delivered positive news. A smaller-than-expected current account deficit (1.2% of GDP) will reduce financing needs, as import compression and lower dividend payments compensate for lower exports and a sharp drop in remittances.
However, the economy is still slowing thanks to the multiple crises. Ukraine's State Statistics Service published its second estimate of GDP growth in 1Q20, along with a more detailed breakdown. The headline figure showed a 1.3% y/y contraction compared with 1.5% growth in 4Q19.
In seasonally adjusted terms, GDP was down 0.7% q/q. The weaker dynamics were mostly attributable to a drop in fixed capital investment (down 21.4% y/y in 1Q20 compared with 18.6% growth in 4Q19).
Most sectors also showed weaker dynamics than in 4Q19. Only agriculture demonstrated a significant improvement in 1Q20, the contraction easing to 1.8% from 6.5% in 4Q19.
Consumption dynamics also worsened. Household consumption growth eased to 8.1% y/y in 1Q20 from 11.7% in 4Q19, while the drop in government consumption steepened to 9.7% from 6.8%.
5 UKRAINE Country Report July 2020 www.intellinews.com
