Slow Reform Sows Discontent
There’s been a disturbing level of discontent over the progress of reforms.We at first thought this was linked to demands for populist solutions. But local elections show that this is not so: Ukrainians are irritated that new elites are returning to their traditional corrupt ways of “doing business,” and setting aside the revolution and the horrible casualties of the past two years in the process.
The epic battle over the new post of anti-corruption prosecutor is the most telling incident. This new position is perhaps the most crucial office in the anti-corruption structure the authorities have been developing for the past two years. The prosecutor is expected to prosecute corrupt high-level officials. To no one’s surprise, local elites were very sensitive about who would be named to this post.So we’ve seen a public fight break out among civic activists, backed by foreign diplomats and the new authorities uncomfortable with the prospects of losing control over the institution.Neither side won. But the appointee doesn’t look capable of engaging Ukraine’s corrupt elites, so the prospects for an anti-corruption battle are very much in question.
Tax reform and the 2016 budget are the other stories making the headlines. On tax reform, the Ministry of Finance appeared wedged between a rock and hard place.On the one hand, there’s been a strong public campaign for tax cuts, and for relaxing tax administration rules.On the other, we see a wave of concern about potential budget cuts, an inevitable part of tax cuts. What’s more, each of these demands needs to somehow fit into the IMF’s 3.7% of GDP deficit cap for Ukraine.
The hryvnia weakened to around 24-25 per $1 by the end of November.Faster public spending and sliding resource prices were the main reasons. We anticipate that the hryvnia will stay below 25 by yearend.
The general budget is still in good shape, with revenues in October rising 45.9% y/y, primarily benefitting from temporary collection boosts from initiatives like Central Bank support and additional import duties. Thus, for October the general budget still had a hefty surplus of UAH 26.8 billion. We don’t see any risks of missing the mark of the 4.2% of GDP deficit cap agreed to with the IMF.
The current account fell into the red, with a $322 million deficit in October, on the back of strengthened gas imports and a more pronounced drop in metal exports. For October, the CAD reached $324 million. By the end of the year, we expect to see it at $1.8 billion, or 2% of GDP. The next round of IMF funding is being delayed due to prolonged budget talks, which means that gross international reserves will continue to hover at around $13 billion, or about three months worth of imports.
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