No pain, no gain: the IMF on pause amid abundant liquidity
The end of the IMF mission without a result, continued nonresident demand for local state bonds and sanctions against advocates of the “Russian world” were the main topics in Ukraine at the start of the year.
The IMF virtual mission ended its work in mid-February, reporting “productive discussions.” Judicial reform, concerns over NBU management and attacks on anti-corruption infrastructure were cited as discussion points. Returned price regulation of the natural gas market, as well as a pending audit of the COVID fund, were also important points leading to the mission’s “no result” outcome.
Still, the Ukrainian side didn’t look disappointed with the outcome, amid strong appetite for UAH-denominated state bonds, which underpin foreign currency inflows and will cover deficit funding needs for now. Nonresidents increased their exposure to local bonds by $93 million, from the day the failure to secure a staff-level agreement with the Fund was reported. Against this backdrop, Ukrainian authorities feel relaxed about staying “on hold” with the Fund, and have even started using tough language in their comments about the negotiations.
In particular, President Volodymyr Zelenskiy stated publicly that Ukraine had differences with the Fund over issues of judicial reform. And he made it clear that Ukraine has a “plan B” if the IMF won’t accept the Ukrainian position.
The decision of the Council of National Security and Defense of Ukraine to close three top pro-Russian TV channels and to impose sanctions on Viktor Medvedchuk, a close friend of Russian President Vladimir Putin and the main lobbyist of the “Russian world” in Ukraine, appeared to be a much more important piece of news for local people than “discrepancies with the Fund.” Zelenskiy has been flirting with pro-Kremlin voters for two years. Initially he sounded fairly dovish, which gave him support of the pro-Russian audience, and allowed ex-president Petro Poroshenko to build his campaigns on patriotic sentiments. However, support of pro-Russian political parties has been growing steadily. Most likely for pro-Moscow voters Zelenskiy appeared to be too pro-Ukrainian, and they drifted to authentically pro-Kremlin politicians. Elections in the United States likely were the last straw for Zelenskiy. He decided to revise his course in line with new leadership in the United States, and to simultaneously destroy propaganda, which steals his voters.
The economy has turned in a mixed performance. Industrial output has dropped by 4.0%, despite soaring export prices. Consumption slightly slowed due to the January lockdown, but remains strong (+4.9% y/y of retail trade). Consumer inflation was reported at +1.3% m/m, or +6.1% y/y in January, slightly less than expected, since official statistics did not reflect the natural gas prices surge. Budget revenues jumped by 29.6% y/y in January on the back of faster inflation, while payroll tax collections are lagging behind, with a modest +5% y/y increase. The trade balance turned negative in January ($284.4 million deficit vs. $41.6 million surplus a year ago), amid a food exports drop and an energy imports surge. But foreign currency inflows for local bonds purchases offset the widening deficit.
The hryvnia is under minor appreciation pressure, amid steady nonresident demand for UAH-denominated bonds. Yet the currency did not travel far from the UAH 28/dollar mark.
Now read on...
Register to sample a report