Ukraine’s turning fortunes are not a ringing endorsement
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Euromoney Country Risk

Ukraine’s turning fortunes are not a ringing endorsement

Continuing engagement with the IMF is a positive sign, but it’s a long way back as the economic, political and security risks are still sky-high.

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Looking up: but economic, political and security risks are still sky-high

Ukraine represents a high risk for investors and is synonymous with the world’s worst defaulters, according to Euromoney’s crowd-sourcing country risk survey.

Not one of the 15 indicators the experts are asked to assess scores more than half the available points. That much hasn’t changed.

Languishing 143rd out of 186 countries in the global rankings, and totting up less than a third of the points available, Ukraine is still far from tier-four status – some eight points and 42 places behind Argentina, which made the leap this year from tier five, the highest default category.

Enduring one political crisis after another and failing to handle corruption have delayed the disbursement of funds from the IMF, therefore keeping the country broadly off-limits against the backdrop of a simmering conflict in the eastern Donbass.

Yet with an economy slowly improving, and a new, reform-minded government installed, the question is whether all that is about to change.


Something positive

Putting the IMF programme back on track is crucial to improving Ukraine’s fortunes, believes the majority of ECR’s contributing experts.

“The geopolitical situation remains tense,” says Iikka Korhonen, head of research at the Bank of Finland Institute for Economies in Transition.

“But as Ukraine receives the third tranche of funding, it will be positive for the country, and also its image abroad.”

The IMF’s approval of the next tranche will act as the catalyst for more aid. Private investors would see this as a positive sign.

Investors will be eyeing the improvements in the fiscal projections stemming from the conditionality imposed on the authorities for receiving the funds.

The government will soon publish its budget for 2017, with the economy already turning upwards.

GDP increased by a seasonally adjusted 0.6% in the second quarter of 2016, and by 1.3% year-on-year, supported by reviving trade and construction.

With a firm commitment to expenditure cuts, the new finance minister Oleksandr Danylyuk should be able to get the fiscal programme back on track… at least that is the hope.

The next big step is to push through structural reforms.

Risks remain high

Yet, the fact Ukraine’s deficit widened during the first seven months of this year is a warning of how big the problems are. Although revenue rose by 4.6% year-on-year, expenditure, soaring 21%, was out of control, putting the deficit target in jeopardy.

The economic recovery is fragile, with GDP rising from an acutely depressed base, and investment weak. It is moreover vulnerable to slowing growth in Europe, and hostilities with Russia increasing.

With privatization delayed, and corruption an endemic problem to address, the risks of not advancing reforms quickly enough, or effectively, remain large, not least in light of the debt problem compounded by periodic exchange-rate weakness when confidence slides.

Another setback

Ukraine’s risk score has fallen again in recent weeks based on early responses to the third-quarter survey, after having shown some modest improvement earlier in the year.

Another survey contributor Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, says there are two main reasons for these increased risk perceptions.

“One is the relative escalation of fighting in Donbass, and the strange story related to the recent capturing of Ukrainian ‘agents’ in Crimea, providing a convenient pretext for Russia to become tougher.

“The second is the delay in the IMF support and the related postponement of funding from other donors tied to the IMF tranches, which was probably one of the main reasons for the recent weakening of the hryvnia.”

Currency deprecation forced the central bank to use up reserves.

Moreover, even though the IMF disbursements are due to resume, which may see Ukraine’s risk score respond in kind, there are a range of political risks linked to the public backlash against austerity, and a failure to stand up to the powerful oligarchs blocking reforms.

“Little has been done to prove that the key stakeholders in the economy, who flourished under the previous government, have been held accountable, or their role is diminishing,” says Lilit Gevorgyan, senior economist and country risk analyst at IHS Markit.

“The big worry is that the current authorities may make the same mistakes as the Orange Revolutionaries, and slip into political wrangling, forgetting their promises made in Maidan, which brought them to power in the first place.”

Adding in the potential for a flare-up of tensions with Russia, and the possibility the economic recovery might buckle as Brexit, Russian trade sanctions or the conflict spiral, a convincing argument for Ukraine has yet to be made.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.

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