Economy is good, but all eyes are on monetary policy
Ukraine continues to move ahead in its idiosyncratic way. Political scandals regularly hum in online media and social nets. Meanwhile, the main TV channels keep soothing viewers with a positive picture of the “people’s president,” as Ukrainians now anxiously await local elections and a second wave of COVID-19.
One big news item in the last month was an FBI raid on U.S.-based offices affiliated with Ihor Kolomoiskiy: the U.S. Justice Department accuses the oligarch of embezzling Privatbank’s coffers and laundering the money. This development will likely have consequences for President Volodymyr Zelenskiy. A year ago, no one even considered the possibility of returning the $5.5 billion withdrawn from Privatbank. But after the loud resignation of NBU Governor Yakiv Smoliy, we expect this to be on the list of IMF requirements as a condition for further funding.
Zelenskiy faces the same challenge in judicial reform as his predecessor did. In mid-July, a scandal broke at the District Administrative Court of Kyiv (DACK), which has special status to review and change decisions by state institutions. The National Anti-Corruption Bureau (NABU) released for public audio records of judges discussing corrupt schemes. NABU also asked the Prosecutor General’s Office for permission to arrest these DACK judges. The request was ignored, and Zelenskiy has been silent on this story. DACK has long been an instrument of selective application of the law in the hands of Ukraine’s presidents. Ex-president Petro Poroshenko regularly used DACK in cases he did not have enough political power to resolve. Meanwhile, although Zelenskiy has consolidated power at the central level, he is expected to lose elections at the local level. DACK might be a very convenient instrument for him to put local authorities “in their place.” If Zelenskiy leaves DACK as it is, Ukraine’s judicial reform will effectively be dead in the water. When the report was drafted the Constitutional court recognized illegal appointment of the Head of NABU, Artem Sytnyk – a response from judges.
Economic developments remain relatively good. The currency stabilized through August after a turbulent July. Retail trade is showing a strong recovery at +7.8% y/y in July. Industrial decline eased to -4.2% y/y in July from -5.6% y/y in June. Consumer inflation remains modest at -0.6% m/m or +2.4% y/y in July. The current account remains still positive despite a growing trade deficit. Gross international reserves are at an eight-year high, at $28.8 billion, or 4.9 months of imports by the end of July.
Budget collections worsened in July, falling 8.0% y/y through the month. However, growing expectations of inflation, coupled with the latest rise in the minimum wage—to UAH 5,000—promise better tax collections than previously expected. We do not expect the budget deficit to be greater than 8% of GDP.
Ukraine successfully placed a $2 billion Eurobond issue with 7.253% yield and maturing in March 2033. Investors ignored the threatened IMF memorandum amid global quantitative easing. MinFin took a chance and bought back 10% of its GDP warrants in August, paying close to 86% of par.
The main concern now is monetary policy. The new governor of the NBU promised the president cheap loans and easier monetary policy. At the same time, we still have two members of the Board from the old team communicating reasonable messages. How these two contradictory realities co-exist in one institution is hard to fathom. In light of the conflicting messages on monetary prospects from various top officials, we see the NBU as a point of uncertainty for now.
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