Page 21 - bne_newspaper_July_19_2019

Opinion
July 19, 2019 www.intellinews.com I Page 21
UAH has helped rein in the ratio of public sector debt/GDP, which fell to just 61% at the end of 2018, from over 80% in 2016. And in recent months, moves to improve the management of public debt with plans to create a Debt Management Office are already bearing fruit through much better communication/issuance strategy.
The move to boost domestic debt issuance at the expense of external issuance is entirely logical
– given the high share and hence vulnerability from the high weight (60%) of external debt in total public debt. The messaging around this strategy certainly helped the Ministry of Finance successfully placed EUR1bn of new 7-year Eurobonds relatively cheaply (yield of 6.75%)
and also has helped reduce Ukraine’s overall borrowing costs, with its dollar curve tightening by 70bps over the past month, and now 250bps YTD.
Improved management of domestic debt issu- ance/markets and Clearstream entry is also now producing strong foreign interest/inflows, helping to cut borrowing costs. Non-resident inflows to the domestic debt market have totalled more than UAH50bn, or close to $2bn year to date, taking their share of the total stock of domestic debt to just under 12% - still low by peer comparison.
Balance of payments: The portfolio inflows noted above have helped support the UAH, and enabled the NBU to increase FX reserves by $1.2bn in June, to $20.6bn or now 3.4 months of import cover. To put this into perspective, this is now four times the level at the time of the Euromaidan. It is even more impressive considering that much official borrowing was stalled over the course of 2017 and 2018 (or at least from April 2017 to the autumn of 2018).
The current account position is, meanwhile,
much improved – posting a surplus of $257m for the first five months of 2019, an improvement
on the $526m deficit in the year earlier period. Exports of agri-food products have been doing particularly well this year, and with a good harvest this looks set to be the story for the full year.
But the continued game changer on the balance of payments and the current account remains worker remittances, which for January through May posted a $5.1bn surplus, up from $4.4bn over the same period of 2018, and well on track to beat the full year total of $11.5bn achieved in 2018, which was around 8-9% of GDP.
The downside is that this reflects the huge num- ber of Ukrainians (perhaps as many as 5mn – of, which at least 1.2mn are thought to now be work- ing in Poland) who now work overseas – and this is a brain drain to Ukraine, and notable creates tight labour markets in some sectors domestically in Ukraine. But the plus is these inflows are helping stabilise the BOP and the UAH ensuring macro- financial stability at home, which should ultimately help spur investment and growth in Ukraine.
Note the remarkable transformation in the current account position over the past decade for Ukraine – from a deficit of 9.2% of GDP in 2013
at the on-set of Euromaidan, to 3.8% of GDP in 2018, and perhaps something much lower this year. This turnaround has been driven partially
by the surge in worker remittances, but also by energy sector reform/rationalisation cutting the gas import bill from $12bn per year to $2-3bn
at present. But the improvement in the current account position looks structural – sure it will rise through 2019 and into 2020 as growth accelerates, but from relatively moderate starting levels.
All told Ukraine appears poised for a new/strong start, politically but also in terms of the macro story. Much will depend though on a new coalition quickly being formed in the Rada, then a reform oriented cabinet and an uptick in the reform agenda as noted about. But it should be said that the Ukrainian macro backdrop, political landscape and opportunity on the economic policy front is perhaps not this clement or hopeful for many years in my time covering Ukraine (32 years now!). Zelenskiy and Ukraine have a wonderful opportunity now to impart transformational and really positive change in Ukraine – let’s hope for Ukrainians that they seize this opportunity.