Recovering from Privatbank’s Nationalization
The recent nationalization of Privatbank, Ukraine’s largest private bank, has significantly changed the national economic climate. Everything proceeded as smoothly as could be expected, despite fears of potential panic at the FX market.
The Ukrainian economy will never be quite the same. First and foremost, the fact that one of the country’s most influential oligarchs has lost one of his most valuable assets sets an important precedent for future governments. Perhaps equally notable is how successfully the government executed the very sensitive takeover. It has also become clear to us that the banking sector and FX market will function somewhat differently now, as Privatbank played a leading role in both areas. We also understand that these kinds of major changes in the economic system (including an injection of UAH 116 billion in state bonds toward the bank’s statutory capital) may have far-reaching consequences for the whole country. There are many potential outcomes – including some we may be unable to detect or comprehend right now.
Leaving potential adjustment risks of the bank takeover aside, we still expect Ukraine’s GDP to grow 2.4% y/y in 2017. In Q3, GDP increased 2% y/y, reflecting better private consumption levels, and some investment recovery with fixed assets. We expect private consumption to maintain its upward trajectory.
The CAD will expand in 2017, as metal prices are expected to decline in early 2017 while imports promise to gain momentum later. This developing trend is expected to result in a $5.2 billion CAD (5.5% of GDP) in 2017, vs. the $3.5 billion estimated CAD (3.9% of GDP) for 2016.
The growing trade deficit continues to exert pressure on the hryvnia. The Privatbank nationalization will open the way for the next tranche from the IMF, or so we have been led to believe. Yet we remain skeptical about the flow of private investment, amid all of the obstructions hampering reform. This scenario promises to lead to growing gross currency reserves (up to $20 billion, or 4.4 months of imports, a significant jump from the $15.5 billion currently available) on the back of IFI loans. The FX market will experience a minor foreign currency deficit, amid scarce private investment, and a subsequent further slide of the hryvnia. We expect the hryvnia to hit the 30 per $1 by the end of 2017.
Fiscal accounts are expected to be in good shape in 2017. Parliament approved the state budget with realistic revenue targets, and a modest (3% of GDP) deficit target. Still, we see risks related to the doubling of the minimum wage, and the potential recapitalization of Privatbank. In particular, the doubling of the minimum wage, differentiated across multiple categories of employees, will tax the budget, with only a 1.5% spending increase (the Cabinet disassociated the minimum wage rates from other spending). But we cannot rule out political pressure playing a factor in the future in adjusting other social payments.
As far as Privatbank is concerned, we see risks of the potential monetization of UAH 116 billion in state bonds (injected into the statutory capital of the bank), which may trigger a new round of FX volatility.
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