New central bank figures show the pace of declining reserves has steadied, suggesting Ukrainians are no longer living in fear of devaluation. While a currency crisis has been delayed, experts warn, Ukraine's economy remains stagnant with few signs of bright prospects in the near future.
Ukraine foreign exchange reserves stayed flat
in March as household demand for dollars declined. Fears of devaluation had
driven the National Bank of Ukraine’s reserves down to $24.7 billion in March
from a peak of $38 billion in April 2011. The sharp fall, however, slowed to a
trickle in December 2012, ending the year at $24.5 billion.
While fears are subsiding, a weak economy and
massive imbalances – including a 8.2 percent current account gap – the rough
relation between exports and imports — in 2012. That is higher than in 2008,
signaling Ukraine is still in the danger zone because it continues to import
more than it exports. Nonetheless, it seems Ukrainian authorities will try to
muddle through the slowdown without addressing any of the country’s structural
problems.
After two weeks of talks, the International
Monetary Fund mission left Kyiv on April 10, noting progress in discussions but
with little concrete results to show for it.
The list of IMF demands remains essentially
unchanged since a previous $16 billion program was aborted in 2010: raise gas
prices for households, liberalize the currency regime and address macroeconomic
imbalances, notably the budget deficit and current account. Fixing an ailing
banking sector joined the list in February.
Yet during the IMF talks, Prime Minister
Mykola Azarov restated that there would no hike on gas prices, while Deputy
Prime Minister Serhiy Arbuzov claimed the hyrvnia “cannot be more flexible than
it is now.”
According to a research note by Capital
Economics, gas prices are currently the biggest problem.
“This is the fund’s key requirement for
lending but would amount to political suicide for the ruling party, which is
already losing its support at home,” the report read.
But a lack of incentives is also playing a
role. The heightened appetite for global risk has allowed Ukraine to issue yet
another eurobond for $1.25 billion at 7.5 percent – bringing this year’s total
borrowings to $4.7 billion. This total covers a third of the $10.5 billion in
foreign-denominated debt due this year, including IMF repayments until mid-May.
With central bank reserves holding up and
reforms no longer an urgent concern, some are questioning earlier forecasts –
about gradual devaluation throughout the year and gas price hikes over the
summer.
“Out of the three policy choices we viewed as
the most realistic for Ukraine — a resumption of IMF funding, a new gas deal
with Russia, and continuing to muddle through — we favored the IMF scenario,”
argues Olena Bilan, macro analyst at investment bank Dragon Capital. “However,
recent developments make us think the probability of the IMF scenario has
decreased in favor of the ‘muddle through.’”
But financing is only one side of Ukraine’s
problem, the other being growth. The country began the year in recession, and
the World Bank currently expects one percent full-year growth, while Capital
Economics projected a 0.5 percent contraction.
Even more worrying, consumption, the main
driver of growth in 2012 , is pettering out. Estimated at 9 percent growth last
year, according to Erste Bank, private consumption is expected to fall by 2
percent in 2013.
The trend is reflected in prices. March
inflation figures were flat compared to February, while a comparison with last
year showed 0.8 percent deflation – a historical low for the month.
To get the country out of this funk, the
government is betting on a massive stimulus program worth $55 billion or some
30 percent of gross domestic product. Scheduled for 2013-2014, the planned
investments in roads, transportation and infrastructure could potentially flare
up growth ahead of the presidential elections, set for 2015.
Even a fraction of this stimulus could boost
growth considerably, but many have questioned where the money would come from.
Although the government has successfully tapped both domestic and international
capital markets, the scale is unprecedented.
Others have raised concerns about corruption.
The stimulus program involves the creation of a State Development Bank, which
would issue debt and transfer budget funds to commercial banks to credit
private enterprises.
But with weak rule of law and high levels of
corruption, “there is a big chance that the competition for individual projects
will not be transparent or fair,” the Capital Economics report warned.
“This, in turn, would raise questions about
the quality of the investment,” it summed up.
Kyiv Post editor Jakub Parusinski can be
reached at [email protected]
