A constitutional crisis looms
Ukraine has entered a very turbulent period of its modern history. A ruling by the Constitutional Court to void the requirement for e-declarations has unfolded into a full-fledged constitutional crisis without any clear legal way out. Legal experts consider the Court’s ruling itself illegal, and in violation of the Constitution. However, no one has come up with a reasonable solution to the problem: rulings made by the Constitutional Court cannot be appealed or re-considered, even if they are illegal. President Volodymyr Zelenskiy reacted sharply to this move. and called on the Verkhovna Rada to dissolve the Constitutional Court altogether. But this led to heated debate, with the point made that an illegal decision to dissolve the Court would only deepen the crisis rather than resolve it. For Zelenskiy, this situation has become a pivotal challenge to his presidency. If he does not get the situation under control, many players will treat him as impotent, and will build their own plans accordingly. At the same time, pushing hard to get through political, but not entirely lawful, measures to quickly resolve the crisis might rebound in aggressive moves against the presidency itself. Given this backdrop, we can hardly expect that cooperation with the IMF will resume anytime soon.
Another disappointment for the president was the outcome of local elections. However, there were no surprises, and Sluha Narodu did poorly. The party failed to win any major city and was lucky to enter the second round only in few mid-sized urban areas, including Zelenskiy’s hometown. Participation was the lowest in the country’s recent history, at 37%. Ukrainians are disappointed with Zelenskiy’s performance, and saw no reason to vote, given the lack of serious changes after the radical reload of the government last year. Local elections also confirmed the rise of pro-Russian political forces. We expect a big reshuffle at the Office of the President, in the Cabinet and in Sluha Narodu.
The economy is recovering, despite a surge in the pandemic, with new COVID-19 cases topping 10,000 a day. Yet the country’s leadership is ignoring the need for tightened measures, and there is no reason to expect a second lockdown. Some extra restrictions have been instituted, but political demand is for jobs and wages. When we drafted the report there was news that Zelenskiy had tested positive for the coronavirus. We do not expect his disease to change something unless the President needs intensive care.
Retail trade is on a strong recovery track, posting +10.4% y/y in September. This trend lends optimism to private consumption performing well in 2020. Industrial output dropped 4.2% y/y, with food processing and metal production driving the decline. Farm sector production appeared worse than predicted, due to a poor grain harvest: a decline of nearly 10% was estimated for 2020.
External accounts performed much more robustly than predicted, amid steadily subdued imports. The current account surplus very likely will approach $4 billion in 2020. In the meantime, in the capital accounts, we see a steady outflow, now that relations with the IMF are in limbo. This capital outflow is putting steady pressure on the hryvnia. Since July, the national currency has lost nearly 5%, and is hovering close to UAH 28.10/USD.
Meanwhile, the budget is performing above expectations. In October, collections grew +8.5% y/y, and +3.9% y/y. Recovering consumption and hryvnia depreciation is behind this growth. Delayed VAT reimbursements have also led to positive fiscal statistics. We expect central budget revenues to exceed the planned levels by nearly UAH 60 billion, or 1.5% of GDP. Still, there is no answer as to what the government plans to do with its 5%-6% of GDP budget deficit, now that no external funding is forthcoming.
In October inflation sped up to +1.0% m/m or +2.6% y/y. We expect the CPI to rise to +5.2% ytd, or +2.8% y/y, in 2020.
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