16:26 22.05.2018

Ukrainian economists warn of default risk, currency, political crisis before election

4 min read
Ukrainian economists warn of default risk, currency, political crisis before election

Not enough pace of reforms in key economic directions threaten Ukraine with default and currency crisis, which could result into the political crisis before holding the presidential and parliamentary elections in 2019, according to economists from VoxUkraine Project and the Kyiv School of Economics (KSE).

" Today, heavy debt repayments and possible macroeconomic and currency crisis require urgent action. If these risks materialize, the government will be unable to fulfill its obligations, including social transfers to the public. This will result into a major political crisis on the eve of the elections," VoxUkraine and KSE said in the article published on Tuesday.

Among the authors of the article are Tymofiy Mylovanov Honorary President of KSE, Olena Bilan from Dragon Capital, Veronika Movchan from the Institute for Economic Research and Policy Consulting (IER) and economists Yuriy Gorodnichenko and Oleksandr Talavera.

They said that Ukraine has been gradually emerging from the economic collapse of 2014-2015. While the growth rate is respectable for a developed country, it remains low compared to developing neighbor-states. Ukraine’s economy advanced by 2.4% in 2016 and 2.5% in 2017, while emerging economies in Europe grew by 3.2% in 2016 and 5.7% in 2017.

Ukraine must pay billions of dollars on its public debt in the near future and will likely have tough time borrowing from credit markets, as recent experience of Argentina and other emerging economies suggests. Though the government has received sizable financial support from the West and restructured its external debt, external financing still remains crucial to keep Ukraine afloat, the economists said.

"The current $17.5 billion IMF program (Ukraine already received $8.4 billion in four of the planned 12 tranches) expires in March 2019, just before Ukraine enters elections' long cycle: Presidential elections in March next year and Parliamentary elections in October.

"But Ukraine's authorities don't have time until March next year as heavy payments start soon," the authors of the article said.

Indeed, Ukraine faces more than $10 billion of external public debt repayments in 2018 and 2019, including principal and interest on external debt. Repayments to official creditors, such as the IMF, the World Bank or the U.S., account for almost two-thirds of this amount. Without new foreign currency borrowings, the NBU reserves will slide below commonly recognized safety threshold of three months of imports already by the end of 2018.

Continuous decline in reserves coupled with increased uncertainty on the eve of elections and unfavorable end-year foreign exchange market seasonality will likely give a rise to devaluation expectations. Pressures on the national currency will build up quickly, putting hryvnia at risk of sharp devaluation," the economists said.

The NBU will be forced to react with interest rate hikes, new capital and exchange controls, and other anti-crisis measures. In any case, anti-crisis measures will dent on already weak economic growth, which will likely undermine the current pro-EU course of Ukraine and give new ammunition to pro-Russian (and populist) forces.

The authors of the article said that moreover, the government may appear on the brink of default even earlier, as the majority of scheduled external debt repayments are to be made from government's coffers, not the central bank. The government faces $6.7 billion of external debt repayments by the end of the next year. Of these, about $2 billion are due already by the end of 2018, while the government's foreign currency liquidity amounted only to $1.4 billion by end-1Q18, on our estimates, including funds kept in state-owned banks. This is sufficient to meet scheduled repayments only till August-September.

The economists propose some measures using which Ukraine could avoid this negative scenario. Among them is the lifting of the moratorium on land sale, boosting protection of property rights, the launch of the anti-corruption court, privatization of state-owned enterprises, reduction of concentration of economic power in a number of sectors, the introduction of the natural gas and electricity markets and improve distribution of subsidies.

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