Most likely the decline in 2020 will be followed by comparably swift recovery in 2021 -- EBRD’s Regional Lead Economist
Interfax-Ukraine's exclusive interview with EBRD’s Regional Lead Economist, Governor of National Bank of the Republic Macedonia in 2011-2018 Dimitar Bogov
-- Ukraine’s National Bank thinks that the country is well-prepared to the crisis and that its economic downturn will be comparable with average industrial decline figures across the region. Is Ukraine really that well-prepared? What are the main macroeconomic challenges?
-- Well, when economies are hit by adverse shocks, those with the weakest fundamentals and the largest imbalances suffer the most. Ukraine did important reforms in the last six years that resulted in macro-financial stability that is stronger than ever in the last thirty years. It entered the coronavirus induced crisis with small fiscal deficit, declining public debt at moderate level, sound, well capitalized and liquid banking sector, low inflation and current account deficit and the highest foreign reserves in the last seven years. However, most importantly, today Ukraine has a central bank that is independent, competent, capable and determined to protect these hard won gains. That was already proved in March, when panicky markets have tested all developing economies including Ukraine, but were soon assured that NBU with its sound macroeconomic management is in firm control of the situation. That is a great asset when the economy is hit by external shock and gives space to government to fully focus on the crisis response.
-- Most of the countries respond to the crisis by increasing their budget deficits. What’s the maximum amount of budget deficit Ukraine can afford? What are the potential sources, which the country can finance this deficit from? Will it be the right approach for Ukraine to introduce additional monetary financing?
-- Most of the countries responded to this crises by fiscal and monetary policy packages aimed to limit layoffs and insolvencies while shoring up individuals’ incomes. The idea is to protect the productive capacity of the economy and after the likely short virus caused interruption to resume production. Reduced tax revenues and significantly increased expenditures inevitably will widen budget deficits and increase public debt levels. Those countries that had prudent fiscal policies in good times have bigger space to support their economies now. Fortunately, Ukraine eliminated quasi-fiscal deficits in the previous years, run low budget deficits and reduced substantially the public debt level. That created some fiscal space for appropriate reaction in this crisis. However, the main challenge is to provide financing for the expected fiscal deficit. It is true that many of the most developed economies embarked on monetary financing of their fiscal deficits. While they have more room for maneuver due to wider use of their currencies in the world as reserve currencies, small economies does not have such luxury. Monetary financing would inevitably result in hyperinflation and endanger the solvency of many companies as well as reduce real incomes of majority of the population. Therefore, the only option is to borrow from multilateral creditors and that way get the trust from the private creditors too.
-- What do you think about the situation with Privat Bank? What are the main risks for Ukraine if it doesn’t get resolved?
-- Authorities have resolved Privat Bank back in 2016 with taxpayers’ money and most likely have prevented a devastating shock to the economy. Now, the struggle is to strengthen the banking regulation and make the cleaning of the banking sector irreversible process like in every other normal market economy. We strongly believe this is going to happen soon and efforts and sacrifices of Ukrainians in the last six years will not go waste.
-- What are the main scenarios for Ukraine’s macroeconomic recovery? Is the V-shaped scenario still possible for Ukraine?
-- Our baseline scenario assumes a gradual relaxation of containment measures and return to normality during the second half of the year, with some sustained negative impact on aggregate demand, in particular in service sectors such as tourism and hospitality. Fortunately, these sectors are marginal in Ukraine. This scenario is consistent with V-shaped recovery and most likely the decline in 2020 will be followed by comparably swift recovery in 2021. Dynamically, growth is projected to resume towards the end of the third quarter. Nevertheless, the projections are subject to unprecedented uncertainty. In a scenario, in which social distancing remains in place for much longer than anticipated, job losses may be widespread and recovery sluggish, with the 2019 levels of output per capita not being attained for years to come.
-- Which industries, from your point of view, will be affected most? Will they require state support? Should the sate let them stagnate and just support redundant employees?
-- Judging by the nature of this crisis export industries (with the exception of agriculture) and services sectors have been already feeling the strain. It is expected that these developments will further damage manufacturing that was already in decline before the Covid-19 induced crisis and reverse the fortunes of many services sectors that were expanding fast in the last several years. Transport companies, hotels and restaurants, retail trade and real estate companies, as well as many small and medium size enterprises from different sectors might be on the brink of survival. Self-employed, employed on temporary contracts and employed in the informal sector remain highly vulnerable to economic disruptions caused by covid-19. The key challenge for government is to support those businesses that are viable and well managed, but whose survival is threatened by this extraordinary crisis.
-- There increasing calls for protectionism in Ukraine and the US is often cited as example. Is this something Ukraine should consider?
-- As a small and open economy, Ukraine can only benefit from free trade. Protectionism brings benefits to small groups who are protected from external competition, while majority of companies and consumers pay the price. If we want Ukrainian exporters to have unrestricted access to foreign markets, then we cannot limit the access of foreign companies on domestic market. Instead of limiting competition on domestic market we need to make domestic companies more competitive at home, but also abroad. Instead of introducing protectionist measures, let introduce the best business environment and eliminate corruption. That will help to all Ukrainian companies rather than just to a few that successfully lobbied for government protection on the expense of all the rest.
-- Your medium and short-term forecast for Ukraine/region. (e.g. decline of traditional industries, growth of online commerce, change of trade flows, real estate market slowdown)
-- In the longer term, response to the Covid-19 crisis may also offer economic opportunities. The crisis may lead to greater scrutiny of supply chains, with an emphasis on resilience and diversification. In many sectors, a single economy, often China, is currently a dominant supplier globally. In some of these sectors the economies of the EBRD regions already enjoy a comparative advantage and high export volumes, with a potential to scale up their exports further. Ukraine with its relative geographical proximity to Western Europe and size that can offer economy of scale is well positioned to benefit from such post crisis development. This crisis will also give additional impetus to information and communication technologies industries, e-commerce and delivery services, while simultaneously challenging the business models of retail trade, real estate services and sharing economy.
-- The decline of the hydrocarbons prices in Ukraine. Will the country benefit from this? Will the renewables suffer from this situation?
-- As a net exporter of hydrocarbons, Ukraine will benefit from the decline of prices. It is assumed that lower outflows for import of hydrocarbons would be sufficient to compensate the likely fall of remittances inflows, thus preventing deeper deterioration of the Balance of Payments. This short-term slump in oil prices will not change the long-term trend toward green economy. Costs of production of renewables energy will continue their long-term decline, while higher frequency of extreme climate events such as draughts, hurricanes and floods will be raising the costs attributed to use of fossil fuels, thus leading to convergence of the costs of production. Ukraine, as a net importer of hydrocarbons could not only benefit from such trend but also increase its energy independency.