It’s been another week of bad headlines of Ukraine’s economy.
Shortly after two of three major agencies downgraded Ukraine’s ratings, new central bank figures showed a further dwindling in the nation’s foreign currency reserves.
The economic slowdown that began in the third quarter with a 1.3 percent contraction looks set to continue: industrial electricity consumption, a leading indicator, fell 5.3 percent last month compared to a year ago. With talks on an International Monetary Fund loan delayed and gridlock in the new parliament, a soft landing seems like an increasingly distant prospect.
Ukraine’s international currency reserves continued on their downward trend in November, falling 5.4 percent monthly to $25.4 billion. According to Dragon Capital investment bank, that’s not enough to cover three months of Ukraine’s imports. Reserves are at their lowest level since May 2003.
rule of thumb widely used by economists, a three-month import cover signals that countries have enough reserves to keep foreign trade operations running smoothly. Falling below this threshold for Ukraine should set warning lights flashing – and it did.
Moody’s and Standard & Poors, two of the top three international rating agencies, both recently downgraded Ukraine’s sovereign rating to anegative perspective. Moody’s deplored a “deterioration in the country’s institutional strength, against the backdrop of poor policy predictability as well as reduced data transparency.”
Sudden devaluation is also worrying investors, who remember the 2009 economic collapse, leading to a 15 percent drop in gross domestic product that y ear.
Dragon Capital currently estimates a gradual shift to 8.4 hyrvnia per dollar by the end of 2012 and 8.8 by the end of 2013, up from the current 8.2. More pessimistic students have put the figure for next year’s as high as 10 hyrvnia per dollar.
This makes Ukraine’s macroeconomic position all the more worrying. The country is facing a large current account deficit of around 8 percent and around $10 billion in external debt payments, the biggest chunk of which goes to the IMF, which froze its lending to Ukraine last year as a punishment for not reaching fiscal targets.
The fund delayed a planned visit to Kyiv on Dec. 7 after Ukraine’s government resigned in the wake of a new parliament, which got off to a raucas start on Dec. 12.
Whether Ukraine manages to seal a new loan agreement depends the politically diffiult decisions to liberalize the exchange rate and increase gas prices for households. However, Ukrainian Prime Minister Mykola Azarov, who was renominated on Dec. 13, has repeatedly vowed not to increase gas prices. Government officials have previously put the date for moving closer to a floating currency exchange rate at the end of 2013.
Reliance on the private sector will be difficult. A recent Eurobond of $1.25 billion at a relatively low rate of 7.8 percent – issued amid growing risk appetite for the high yields on emerging market debt – is unlikely to be repeated. More borrowing on private markets is likely to be prohibitivly expensive.
Constructive solutions are still nowhere in sight as the new parliament remained locked in brawling and arguments on Dec. 12-13, before finally electing pro-presidential member of parliament Volodymyr Rybak as its speaker.
Azarov, meanwhile, has promised not to act on Ukraine’s most pressing problems and the loyalist of President Viktor Yanukovych is seen as unlikely to bring any dynamism with him. As a result, Kyiv-based investment bank ICU is pessimistic about the upcoming talks with the IMF. And it cited age as a factor. Azarov is 65 and Rybak is 66.
“While the Party of Regions supports the appointments of Mr. Rybak as the parliament speaker and Mr Azarov as the prime minister, both candidates are over 60 years old, meaning that their policymaking views are most likely quite outdated. For an economy in dire need of a wide spectrum of reforms, old tricks are more likely to be a hindrance than a catalyst for advancement,” the investment bank wrote.
Kyiv Post editor Jakub Parusinski can be reached at [email protected]
