(Failing to) fake out the IMF
Relations with the IMF have become a real headache for the presidential administration. Ukraine’s creditors have made it clear that an independent anti-corruption court is a must. The president’s office has tried to circumvent that demand, by submitting a bill to the Verkhovna Rada that set unrealistic requirements for the candidates, hoping this would derail the process. But the IMF openly criticized this stance, in a letter leaked to the public, and asked that the unrealistic requirements be withdrawn. Moreover, the IMF insisted that a body independent of all Ukrainian authorities—the Public Council of International Experts — take the lead in selecting the judges.
This scenario ran against President Petro Poroshenko’s plans, as his actions make clear that he fears the independence of the anti-corruption court. Someone— many point to the president’s office --- launched a local information campaign against the IMF. First, pro-presidential media argued that corruption was not an impediment to economic growth or development. Then, Ukrainians were told that the IMF had softened its position on the anti-corruption court. This latter was rejected by the Fund, when IMF spokesman William Murray stated that “there's no truth to the contentions.”
How relations with the IMF will develop now is anyone’s guess. Poroshenko isn’t prepared to install an anti-corruption court before the 2019 elections, as he views that as a personal threat. He’s trying to bargain for the next wire at a lower cost, such as a privatization law and a hike in natural gas rates. But these measures won’t count without an anti-corruption court.
Industrial output dropped by 0.1% y/y in 2017. Hit by the trade blockade of occupied Donbas, mining was the main source of this poor result: coal extraction plunged by 16.3% y/y, given the loss of mines on the other side of the frontline. But industrial output should recover in 2018, to +2.8% y/y. Retail trade grew 8.6% in 2017, well up from 4.4% y/y a year ago, as incomes rose. We expect private consumption to keep recovering in 2018.
Consumer inflation remained high, at 13.7% ytd in 2017, as food prices grew. Prices are expected to grow strongly in H1 2018 too, driven by this inflationary spiral. Inflation should ease in H2, in line with better farm results. Budget revenues exceeded targets in 2017, which translated into a 1.5% GDP deficit, down from 2.3% a year ago. Fiscal prospects look positive, so a 2.5% of GDP deficit target is quite realistic for 2018. The CAD reached $3.8 billion, or 3.5% of GDP in 2017, up slightly. Increased individual money transfers were the main reason. We expect the CAD to expand to $4.4 billion, or 3.8% of GDP, in 2018, as the trade deficit expands. We expect the hryvnia to depreciate, to UAH 30, by December.
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