Too slow economic growth remains the biggest problem of the Ukrainian economy. Despite macroeconomic stabilization, inflation control and population income growth, Ukraine’s economy is still growing too slowly to be considered sustainable. In two quarters of this year, the economy accelerated to very modest 3% year-over-year. Drivers are traditional – consumer demand and construction. According to the forecasts of the National Bank, economic miracles should not be expected in the next two years: in 2020, economic growth will accelerate to 3.2%, and in 2021 – to 3.7%. The pace is very restrained, given the depth of our decline at the peak of the crisis and the risks in the coming years. There is too little time to create a “safety cushion” for the Ukrainian economy.

Global risks

World trade wars and the proliferation of protectionist measures have a significant impact on world trade. Global production chains are breaking down, demand is declining, and the global economy is on the verge of stagnation. Nowadays Ukraine benefits from this because the situation in the commodity markets is in our favour. In particular, world prices for iron ore and grain have grown to the delight of our exporters. But in the medium and long term, no one benefits from trade wars, and global recessions are especially painful for the developing countries. And it is desirable to prepare for the future crisis now, in order not to lose everything we’re left with when the world economy begins to fever.

According to the Saxo Bank analysts, the lowest point in the economic cycle for China is in the third quarter of this year, and for the US, Britain and Europe – in the first and second quarters of 2020. These are the coordinates of the global crisis.

All ten of the PMI indices reflecting economic trends in world production have declined. The decline in production slows down global trade and reduces export, and the worst thing is that demand is also falling. That is, the world began to produce less through trade wars and violations of production chains, but no one wants to buy all that it manages to develop in the usual volumes. The world bank lowered its global economic growth forecast this year to 2.9% due to a slowdown in international trade and industrial production in developed and developing countries. As a result, the expected growth of the global economy came close to the lowest indicators after the crisis of 2008. If the global economic crisis does come, it will develop according to a well-known and well-developed scenario: developed countries will resort to the issue of money to “save” themselves, and as a result, developing countries will not be able to pay or refinance their foreign exchange loans, and will fully feel the outflow of capital from their markets.

We use the existing favourable situation in foreign markets as much as we can, but we do not have a big “safety margin”. According to the NBU, the export of goods was growing in January-May 2019 at a steady pace primarily due to a record harvest of corn and sunflower in 2018. The latter led to high growth rates of physical exports not only of oil but also of oil cake, given the significant demand for organic feed in Asia. The growth of iron ore export has also accelerated significantly due to the rapid increase in world prices. Overall, however, export growth remained relatively subdued. However, import growth is not losing its pace: individual purchases of food and industrial goods, goods for intermediate consumption, fertilizers, electrical equipment and the like have increased. With such a balance of power, it will be very difficult to withstand the global crisis.

Local calls

Now our economic growth is based on a good harvest, high prices in foreign markets and the growth of consumer demand, which is fueled by the growth of wages. But the harvest cannot reach records every year, and wages will not grow rapidly from year to year. If you look at the results of the implementation of our budget for the half-year – the picture will not be unambiguously optimistic. In general, tax revenues increased by almost 11% compared to last year but did not reach the level hoped for by the Ministry of Finance, because the revenue plan was not fulfilled by almost 9%.

So, due to the growth of wages, the revenues from the physical persons’ income taxes have grown by 21%, exceeding the planned figures by nearly 5%. The contribution to the State Budget from the corporate income tax has grown by 1.2%, thanks to the stabilization of the economy. Anyways, the State Budget received less than expected by the Ministry of Finance: 9.8 billion UAH of VAT on goods produced in Ukraine, 8.9 billion UAH – from the excise tax on tobacco products, 2.1 billion UAH – from rent, 13 billion UAH – from dividends. The Ministry of Finance is also disappointed by the revenues from the “import” VAT because due to the lower hryvnia exchange rate than accounted for in the budget, they met 97.6% of the plan. So not everything is as stable as it seems at first glance. And this greatly affects the expenditure part of our budget. According to the NBU, the significant growth rates of capital expenditures in January-April were followed by their sharp decline in May, and the slowdown in spending on the use of goods and services was followed by the fall in their volumes in May. Such changes in May and a generally moderate increase in spending in January-May are due to the significant needs of the government to finance its debt obligations. The government needs money to finance debt, and everything it could spend on capital investment is burned in the debt fire of our state.

In fact, the market has long been waiting for a reduction in the key rate of the NBU, which would make credit funds cheaper. However, the NBU is in no hurry to radically soften monetary policy and they reduced it only to 17% because the high key rate affects not only the cost of loans for business but also the yield of government bonds, which are generously sold by the Ministry of Finance. The yield of our government securities is now very attractive, perhaps the highest among developing countries, and there are a lot of people who aspire to invest in Ukraine. But this money is also used not for capital investments, but for the repayment of previous debts.

According to the NBU, significant amounts of resources that the government attracted in the domestic and foreign markets during January-May were primarily associated with a tight repayment schedule and significant amounts of debt service costs. Despite the placement of government bonds and loans under the guarantee of the World Bank, loans on the domestic market remains a key source of funding. The government has significantly increased the volume of government bonds in the local currency, while liabilities on bonds in foreign currency was significantly reduced. In fact, the government used the available hryvnia resources, also for conversion into foreign currency – then these funds were used for payments on domestic debt in foreign currency and accumulation of foreign currency resources for future payments on foreign obligations. As a result, the currency structure of the debt gradually improved – its share in foreign currency decreased. This is the right tactic that reduces our debt risks in the future. But the high rate, which attracts “speculators” who buy our bonds, and allows our banks to earn on the sale of bonds, deters domestic businessmen who are not ready to take such expensive loans.

For the first time, the regulator has launched a regular publication of the discount rate forecast, which will make its policy more transparent and understandable, but not too soft. At the beginning of 2020, the regulator plans to reduce the key rate to 15%, and by the beginning of 2021 – to 9.5%. That is, the real easing of monetary policy and the resumption of corporate lending can be expected no earlier than in two years.

It will be good if nothing extraordinary happens over these two years, but it is doubtful anyone will guarantee it, especially now. Ukraine should maintain cooperation with the IMF, but it does not even understand now what the government will negotiate with the Fund in the autumn. Ukraine should show the main partners and donors the progress of reforms, but a complete political reset does not give us an understanding of what these reforms will be, and whether they will be at all. Ukraine should show the potential investors its readiness to protect their rights and interests, but every new odious court decision in favour of local oligarchs shows them otherwise. One risk is added to this bouquet – the cessation of gas transit from 2020, with a decrease in foreign exchange earnings and devaluation pressure on the hryvnia. If at least one of these risks is realized, the NBU will return to a tight monetary policy and Ukraine’s economic growth will slow down once again.

Criticizing such a choice is foolish, the regulator is doing everything to prevent another shock in the economy. But still, it has levers that could help accelerate the economic pace, while maintaining a tight monetary policy.

Now the discount rate of the NBU determines both the cost of our government bonds, on the sale of which banks are now earning well, and the rate on deposit certificates of the NBU – which are another risk-free option for bankers. As a result, banks make good money on the tight monetary policy of the NBU and have no appetite for lending to the economy. If the regulator agrees to take at least one of these “channels of earnings” from the arsenal of banks, this would already be an incentive for the growth of lending. Because the current state of affairs is nothing but a disaster: the level of GDP coverage by bank loans of 2014-2018 has fallen from 57% to 29%, and the amount of money in the economy has almost halved over the past five years. This is not enough to accelerate economic growth and even more so to survive the global recession.

Text by Valentyna Yushchenko

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