A new broom sweeps clean
Ukraine on June 14th placed €1 billion in Eurobonds: a piece of incredibly good news, amid messy domestic developments. The country seems to look more attractive from the outside than from the hills of Kyiv.
Ukraine is undergoing a kind of creeping revolution—a destruction of the traditional ways of doing business. Only a month has passed since President Volodymyr Zelenskiy’s inauguration, but the national establishment has already experienced several shocks. This has roused drastic rejection, not only among corrupt rent-seekers, with the Verkhovna Rada simply sabotaging all of Zelenskiy’s legislative initiatives, but also among traditional reform supporters, such as Ukraine’s middle class, which has also been scared by the new administration’s style and direction.
Recent polls show that established older parties are giving way to new ones. Zelenskiy’s Servant of the People party is maintaining its lead, with polls predicting 48% support, and has a good chance of gaining an absolute majority in the legislature. There could yet be surprises in the FPTP ridings, historically controlled by the regional elites. However, many strong candidates plan to run for such seats, under the banners of new parties.
Renowned rock musician Svyatoslav Vakarchuk bowed out of the presidential race last winter to lead a political party, Holos (“The Voice”) into the legislature. Holos has assembled a strong slate of reputable professionals, and by early June was polling as a potential force in the Rada, with around 6% support. Holos will likely cut into ex-president Petro Poroshenko’s support, as both parties appeal to the same voters.
Rumors about tycoon Ihor Kolomoyskiy’s influence over Zelenskiy appear to be a real challenge for new president. Kolomoyskiy’s ill-considered advice to default on sovereign debts even triggered a sharp but brief dip in the hryvnia. After Zelenskiy publicly rejected such talk during a visit to Brussels, the storm eased. Talk about Zelenskiy’s supposed position as “Kolomoyskiy’s puppet” has not been taken seriously for several weeks now.
Still, the IMF mission made it clear that cooperation with the Fund would be on hold until a new Cabinet is in place. Since Ukraine has reached almost of all the structural benchmarks of its current IMF program, we expect funding to resume when the political cycle ends.
Ukraine’s economy is performing impressively. Industrial output picked up to 5.2% y/y in April. Consumption remains strong: retail trade grew 9.8% y/y in April, while consumer inflation eased to +0.7% m/m in May, from +1% m/m in April, on a slowdown in food prices. CPI promises to ease to +6.3% ytd, in line with NBU targets.
The National Bank left the prime rate unchanged at 17.5%, in the face of a turbulent political process. But monetary authorities plan to maintain an easing cycle once that subsides. We expect the NBU to cut the prime rate to 16% by the year’s end.
Fiscal accounts are sending worrisome signals. NBU dividends are the only reason for good budget numbers so far, +15.4% y/y by May for the central budget, while core tax collections have been unusually slow. Revenue underperformance of up to 0.5% of GDP can be expected in 2019. The hryvnia has lost 2%, slipping down to UAH 26.90/USD by the end of May, at the height of Kolomoyskiy’s default talk. But it recovered quickly, to 26.40 at this writing.
The CAD has been increasing gradually, and was up to $388 million by April, from $354 million a year ago. Gross reserves dropped to $19.4 billion in May, as Eurobonds repayments were due, but will recover on the €1 billion Eurobond placement in June.
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