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24 February, 2020  ▪  Lyubomyr Shavalyuk

Hostages of politics

What will the Ukrainian economy depend on in 2020?

In 2019, no significant risk predicted by economic analysts was realized. On the contrary, most of the areas where threats were seen received good news.

In early 2019, everyone was afraid of a double election. There was no certainty as to how the country, in particular its economy, would outlive it. Although the results of the election blew all forecasts to smithereens, but the economy did not have a negative impact. What is more, it seems that many investors and economic agents were overwhelmed by the same euphoria that the Ukrainians were driven by when choosing a new president.

At the beginning of the agrarian season, most agrarian analysts predicted that this year’s crop could not surpass the historic record set in 2018. But the 10-month statistic shows a 3.3% increase in the agricultural index. That is, in 2019 the Ukrainian agribusiness worked no worse than the previous year. This has well supported export and balance of payments and financial stability in the country.

In 2018, there was an acute shortage of government borrowing, internal and external. Along with the shortfall in budget revenues, this created extremely bleak prospects for the implementation of the state financial plan in early 2019. But as a result, for a year, which is not over yet, foreign investors have invested more than UAH 100 billion in domestic government bonds (T-bills). This answered all budgetary questions, and stimulated a reduction in interest rates in the economy and an appreciation of the hryvnia.

Finally, the last months of 2018 have proven to be extremely difficult for emerging markets, as they have been forced to watch capital outflows, depreciating their currencies, suffering losses in the stock markets and ultimately resorting to rigid monetary policy. All this resulted in a bleak outlook for 2019. But it didn’t come true either. Because the US Federal Reserve realized that it had gone too far with rigid monetary policy and, by having made a U-turn in response, began to lower its discount rate and increase its balance sheet. Emerging markets breathed a sigh of relief, and the entire negative outlook, including commodity price falls, didn’t come true. The headwinds of global financial markets bypassed Ukraine as well.

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As a result, being on a roll, the economy of Ukraine is facing 2020. The US dollar is unexpectedly cheap. GDP growth is not bad, as it exceeds 4% for the second quarter in a row. Inflation is low and close to the NBU’s long-term goal of 5%. Interest rates are plummeting as a result of sharp improvement in risk perception by economic agents, both domestically and abroad. It would seem that everything is fine and we are entering a period of unprecedented positive economic results.

But one should not fall into euphoria. Because the economy is an inert system that cannot change dramatically in a few months, even the government carries out the most ambitious list of reforms possible. The current economic situation is primarily due to a psychological factor. This is both good and bad news. Good because society is mobilized and ready for change. A huge window of opportunity has opened up to be used for the benefit of the country. And bad is because the current economic performance is a consequence of the not quite rational advances that Ukraine received from its citizens and foreigners after the change of power. If the advances are not paid off, then soon there will be disappointment, which will entail crisis economic processes.

The year 2020 should show whether the new government justifies the advances received, and whether it can avoid mass disappointment among those who once trusted it. It all depends on public policy. To be successful, there are two key prerequisites: a political balance in the broad sense and quality staff. For today there is none of them. The lack of balance can be observed from how individual oligarchs take control of government assets and how acutely society and opposition politicians respond to the introduction of the land market. Lack of quality staff is indicated by numerous testimonies of eyewitnesses to how new people come to the civil service with the change of government.

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Therefore, one can admire how the new government offers correct reforms for the Ukrainian economy. Its proposals sound amazing. But most of them do not have the resources to cover their rear. Therefore, there are considerable doubts as to whether public policy in 2020 will meet the needs of the current historic moment. You can hope for that, but you can’t rely on it.

Rely on ourselves

The situation will be aggravated by some of the problems inherited from 2019. The expensive hryvnia has hit a lot of manufacturers, especially those working for export. There are signals of declining investment in entire industries, which, at current exchange rates and wages, have made revenue less than costs. If this trend continues, it may translate into a significant decline in GDP growth as early as in 2020.

Ukraine is in line with the global trend of industry stagnation: in the three quarters of 2019, our volume of industrial production has not changed, and the monthly indicators show a steady decline since June. Industry occupies too large a share in the structure of the Ukrainian economy. And if in the developed economies the service sector is able to pull through the overall growth rate, then in ours – no. A cheap hryvnia might mitigate these processes, but we do not have it.

Finally, it is not entirely clear what may force non-residents to buy hryvnia debt at the previous year’s pace in 2020. Interest rates fell by almost a third over the year and the hryvnia went up. The attractiveness of Ukraine’s government bonds has dropped significantly. The only thing that can support it is a significant increase in the credit rating, combined with the international investors’ appetite for developing countries’ risk. And the rating will only grow as a result of consistent large-scale reforms. As the experience of our western neighbors shows, it takes time.

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The economic situation in international markets will complement the picture. Responding to the trade wars and slowing global economic growth, the world’s leading central banks have begun to soften monetary policy. As a result, the assets and currencies of developing countries have stopped falling and even increased slightly. However, their economies are still slowing down, as monetary stimulus has not gone into the real sector, and has largely resulted in the setting of new records in the stock markets of developed countries. So now the Federal Reserve is dominated by the thought that a pause in the discount rate should be taken. This means that we should not expect support from the policies of the world’s largest states and central banks.

It seems that in 2020 we will have to rely on ourselves and our own state economic policy. The trouble is that in the history of independent Ukraine, the expectations of business and economy for the state and politics have never been justified. Because our country is not accustomed to working for the economy, but it rather tends to hostage it for ransom. How will it be this time?

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