NBU ouster likely to stall IMF deal
The replacement of the head of the NBU was the key event of recent weeks. On July 1st, Yakiv Smoliy submitted his letter of resignation, claiming political pressure. The move triggered a real storm. Forced replacement of the Central Bank governor is a blatant violation of the IMF memorandum, which included the requirement that the Central Bank remain independent. The situation was aggravated by the fact that the move was arranged just after the IMF wired Ukraine $2.1 billion, under the new agreement. Pro-presidential speakers tried to communicate that Smoliy’s resignation was his own decision. But after months of open pressure, it was difficult to believe he resigned voluntarily. The currency started weakening, amid mounting depreciation sentiment. Even appointment of new central banker, Kyrylo Shevchenko, did not improve the negative mood. Shevchenko used to be the head of Ukrgazbank, a state-owned commercial bank, and is seen as totally oriented to the president’s office. We expect there to be a pause in NBU replacements, to let the dust settle. But in a while, Shevchenko will start working actively to meet Zelenskiy’s expectations. Four out of six members of the NBU Board remaining from the previous management are expected to be replaced soon. And we believe the IMF program will be put on hold.
Though the new NBU head, in his first address, stated that the Bank should continue prime rate cuts for the sake of cheaper loans, the NBU Board, remarkably, on July 23rd left the prime rate unchanged, at 6%. Likely this is because the majority of the Board are still members of the old team. And this decision also clearly demonstrates why we expect complete eventual replacement of NBU management.
The economy is showing clear signs of recovery. Industry decline slowed to -5.6% in June, from -12.2% y/y in May. Retail trade moved into the black, increasing by 0.6% y/y in June vs. 1.5% y/y in May, and -11.5% y/y in April.
Inflation in June eased to +0.2% m/m, from +0.3% m/m in May. But permanent talks from top decisionmakers about the necessity of faster inflation, as well as President Volodymyr Zelenskiy’s claim about UAH 30/dollar exchange rate budgeted in the 2020 spending plan, promise a substantial speed-up in inflation by yearend.
Central budget collections jumped 63.7% in June. That wasn't magic -- just extraction of 2019 profits from state-owned assets Privatbank and Naftogaz. The weakening hryvnia and reviving economic activities should help with state collections in coming months.
In external accounts, we see the trade deficit returning in June, on the back of slowing imports decline. According to provisional customs data, the trade deficit in goods was $644 million in June, up from $122 million in May, and a deterioration from the $273 million surplus in April. The deficit is lower than it was a year ago. Nevertheless, it’s clear that eased lockdown is translating into trade deficit – and that the deficit will expand.
The replacement of the NBU governor triggered FX market volatility. Since July 1st, the hryvnia has lost near 4%. Zelenskiy’s talks about a UAH 30/dollar rate fueled depreciation sentiment. It looks as though nonresidents are withdrawing from hryvnia-denominated state securities.
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