Visa-Free Travel to Europe A Feather in Poroshenko’s Cap
Positive developments in April included receipt of a third IMF loan tranche, the European Parliament’s surprise approval of a visa-free regime for Ukraine, a big win for the president that should nicely position him for a second five-year term. The Verkhovna Rada approved a key law for electricity market reform, and the government is advancing both pension and land reforms.
Though long expected, NBU Governor Valeria Hontareva’s resignation was unpleasant news. But her potential successor, Raiffeisen Bank Aval Chairman of the Board Volodymyr Lavrenchuk, has a strong reputation in banking circles, and is expected to maintain Hontareva’s reform course.
The hryvnia continued to benefit from high global commodity prices, and positive reactions to the IMF tranche. The currency inched up 1.7%, to UAH 26.6/dollar in April, from UAH 27. Remarkably, that was despite continuing industrial decline, at -2.7% y/y, as warmer March weather caused heat generation to plunge 36.3% y/y, and the impact of the blockade of the occupied Donbas was felt: mining fell 8.9% y/y and metals slipped 2.2% y/y.
Retail trade picked up in March, up 8.8% y/y from -1.8% y/y in February. Over Q1 2017, licensed retail trade grew 3% y/y. But the number still looks disappointing, amid official reports about double-digit real wage growth of +18.7% in March, and a doubling of the minimum wage.
Consumer price inflation sped up 1.8% m/m to +15.1% y/y in March, from 1.1% m/m or 12.6% y/y in February. Stronger inflation was stimulated by a jump in prices for clothing and footwear, +10.5% m/m, and a +5.0% y/y utility rate rise. Still, major inflation factors have already come to bear, and inflation should now slow.
The NBU on April 13th cut its policy rate by 1 pp, to 13%, despite stronger inflation in March and the governor’s resignation. Monetary authorities are indicating that easing will continue.
Budget collections keep growing powerfully. The Treasury provisionally reported a 98.7% y/y surge in central budget revenues in April. The surge stems from $1.1 billion confiscated from the Yanukovych team. But other core sources of budget revenue continue to post double-digit growth. The budget deficit is projected to fall below the 3% of GDP limit in 2017.
External accounts benefited from high exports prices, the trade blockade notwithstanding. Over Q1 2017, the CAD reached $1.2 billion, still lower than the $1.5 billion of a year ago. But this trend is expected to change, as metal prices roll back. Financial flows performed worse than projected, due to sluggish private investment inflows.
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