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Opinion
July 19, 2019 www.intellinews.com I Page 20
before, which guarantees a new fresh look to the parliament.
That said, while the Rada supported a new electoral law in a bill approved earlier on July 11, moving to a full proportional representation system, these rules only come in for the election after this one.
This election will hence be determined by a joint proportional representation/constituency based system, which has tended to bias candidates repre- senting oligarchic interests. The constituency-based system does tend to benefit the dominant party also in the proportional representation system, and if SoP polls in the 45-48% range, it would be in a very good position to take a majority in parliament.
This could be the first time ever, if achieved, since Ukrainian independence where a single party secures a majority – good news if Zelenskiy is really reform orientated.
That said, my base case would be SoP falls short of a majority and forms a coalition, most likely with Voice, but perhaps even Fatherland – but in any case a pro-European party.
Voice’s more radical reform orientation would make that scenario a best case – and with Fatherland I guess there would be concern that Yulia Tymoshen- ko would demand the post of prime minister as the price for Fatherland’s cooperation. Given her cheq- uered track record in office markets might not be so appreciative of this – and especially as some reform members of the Zelenskiy team might be reluc- tant to serve in a Tymoshenko cabinet.
Fortunately Ukraine goes into the elections,
with the macro story appearing solid and even improving – acclaim therein to the sound policies of the NBU and the Ministry of Finance.
Ukraine’s economy recovering
Growth: Real GDP growth came in around 2.5%
in Q1, after 3.3% growth for the full year in 2018, but with a good harvest, and improving confidence
indicators, expectations are building that we could see an acceleration in growth through the year, with the NBU signalling recently that they may increase their 2.5% growth assumption for the full year. The cabinet of ministers recently suggested real GDP growth accelerating to 3.3% in 2020, 3.8% in 2021 and 4.1% in 2022.
If elections run smoothly, a reform administration is formed quickly cementing a new deal with the IMF and rolling out a reform agenda, I could easily see growth well above 3% this year, and even the above forecasts for 2020 – 2022 might prove overly cautious. Much will depend on critical reforms being rolled out covering the anticorruption agenda (a functioning anti-corruption court), land reform and broader momentum in improving the business environment – continued energy sector reform (utilities unbundling). And importantly no cock up in the handling of the challenge to the nationalisation of Privatbank.
Inflation: The NBU continues to run a tight
and prudent monetary policy stance and this
is bearing fruit in the fight against inflation.
The consumer price inflation (CPI) has been sticky around the 10% level, but the headline
CPI dropped to 9% in June, and with a good harvest, the UAH seeming stable and helped
by very high real rates from the NBU (850bps, given the 17.50% base rate) prospects for
further disinflation this year seems good. All this assumes that elections pass without incident, and tensions in the east remain subdued sufficient not to impact negatively on the UAH.
Public finance: The Ministry of Finance continues to run a tight ship, with the state budget in surplus still for the first five months of 2019, impressive given the electoral cycle. The revenue side has been struggling in recent months as the strong UAH moderated VAT receipts. That said, spending restraint, and lower debt service costs, should still keep the budget deficit for the full year around the 2% of GDP level – on par with the average 1.6-7% deficits maintained for 2017-18. Maintenance of moderate deficits, and real appreciation off the