Ukraine’s government is heading into 2020 with moderate optimism — and not without reason.
The Ukrainian economy is growing. The national currency, the hryvnia, is the strongest it has been in four years. The International Monetary Fund (IMF) has approved its next loan to Ukraine. Finally, the country has agreed on a new gas transit deal with Russia.
The economy is as good as it gets, according to local experts.
There is a number of reasons why Ukraine’s economy stands where it does. While the government contributed to the situation, experts give the most credit to the IMF’s lending program.
“It is a merit of our cooperation with the IMF…What we have, all the economic growth is based on our cooperation with the IMF because the IMF is laying out our macroeconomic framework, thanks to which investors have trust in us and give us money. That allows us to move forward,” investment banker Sergiy Fursa told the Kyiv Post on Dec. 24.
On Dec. 8, the IMF promised Ukraine a new three-year loan program worth $5.5 billion. It is expected to be signed in the beginning of 2020 and will replace the previous $17.5-billion lending program, from which Ukraine received $8.7 billion before funding stopped due to Kyiv’s failure to meet IMF demands and conduct a number of reforms.
The IMF’s backing gives foreign investors the green light to put money into Ukraine, according to experts.
Meanwhile, the Ukrainian GDP’s real growth stood at 3-4% in 2019, roughly the same as in the past several years.
IMF loan
Securing a new loan from the IMF — even though negotiations did not go smoothly and did not finalize on time — is nevertheless a big success for Ukraine, according to Fursa.
News of the IMF’s $5.5-billion lending program for Ukraine broke on Dec. 8 after a phone call between Ukraine’s president, Volodymyr Zelensky, and the IMF managing director, Kristalina Georgieva. It strengthened Ukraine’s bargaining position prior to Zelensky’s first face-to-face meeting with Russian President Vladimir Putin on Dec. 9 in Paris on the sidelines of the Normandy Four peace talks on Ukraine’s eastern Donbas region, which has been partially occupied by Russian-backed militants since 2014.
This deal will become the third IMF package for Ukraine since Russia’s 2014 annexation of Crimea. The previous two packages, of $15 billion and $17.5 billion, were signed in 2014 and 2015.
The new deal will not be signed before the end of 2019, as expected, because Ukraine failed to show the IMF enough success in tackling corruption. Kyiv has not passed several bills crucial for the IMF, including one that makes it impossible for crooked former bank owners to overturn the nationalization of banks that were seized by the state in order to save them from bankruptcy.
The bill mainly concerns the case of PrivatBank, Ukraine’s largest private bank, which was nationalized in 2016 after authorities discovered a $5.5-billion hole in its balance sheet. Since then, the bank’s former owner, oligarch Ihor Kolomoisky, has been suing the state in an attempt to recover the bank or receive compensation, which the IMF strongly opposes. Ukraine’s courts appear to favor Kolomoisky.
Hryvnia value
The Ukrainian hryvnia has been the world’s best-performing currency since the beginning of the year, according to Bloomberg. It leads the ranking with 19% growth against the dollar, leaving behind Russia’s ruble, which strengthened by 12%.
Ukraine’s hryvnia started showing steady growth in the beginning of 2019.
One of the factors contributing to the hryvnia’s stabilization is the low level of inflation. Inflation dropped to 5% in 2019, reaching the lowest level in six years. In 2018, inflation in Ukraine was estimated at 9.8%. In 2017, it stood at 13.7%.
“A new phenomenon of the current year is extensive inflation moderation and vital hryvnia strengthening. For the first time in the last six years, inflation is measured in the single digits…and industrial prices are experiencing deflation,” Viktor Pynzenyk, a Ukrainian politician, economist and former minister of finance said in a Facebook post.
A strong hryvnia is bad for Ukrainian exporters and it hurts the state budget, according to Fursa. However, the National Bank argues that it helps curb labor migration.
“The hryvnia appreciation seen this year – as well as the rapid growth in Ukrainians’ nominal wages over the past few years – is a strong driver slowing labor migration,” National Bank Deputy Governor Oleg Churiy told to Bloomberg on Dec. 20.
“Our citizens are notably less interested in looking for work abroad,” he stressed.
GDP increase
From June to September 2019, real GDP growth increased by 4.1% compared to the same period in 2018 – something that was beyond expectations, experts say.
“(GDP growth) exceeded 4% and beat the consensus forecast. Record-high consumer confidence since 2008, growing wages, and surging retail loans boost consumer demand, the key driver of the Ukrainian economy in 2019–2020,” says a report by the Investment Capital Ukraine (ICU) investment firm, published on Dec. 20.
The ICU, however, predicts a decrease in GDP growth.
“We expect real GDP growth to slow to 3.2% in 2020 from 3.6% in 2019,” it wrote in the report.
“Still-high external debt repayments will hinder the government from substantially stimulating consumer and investment demand. Lower transit volumes of Russian natural gas will additionally hamper growth,” the report says, referring to the gas transit deal Ukraine and Russia agreed on Dec. 20.
The deal seeks to secure Ukraine’s profits from gas transit as Russia prepares to launch its Nord Stream 2 pipeline, which will transport gas to Europe bypassing Ukraine.
The new five-year deal requires a minimum of 65 billion cubic meters of Russian gas to be transferred through Ukraine’s territory in 2020. This will drop to 40 billion from 2021 onward.
In 2017, Ukraine transported 93 billion cubic meters of Russian gas to Europe — an amount unseen for a number of years before. However, after such a jump, the transit decreased to 86.7 billion cubic meters in 2018. From January to November 2019, 81.5 billion cubic meters of Russian gas passed through Ukraine’s transit system.
