Saturday, September 13, 2014

13/9/2014: Ukraine's economy newsflow: from bad to worse

A small digest on Ukrainian economy - mostly news, less analysis.

Some grim stats on Ukrainian economy here:
A very comprehensive survey, despite some politically loaded statements. Read it for the stats and ignore all political ravings.

Meanwhile, the prospect of Ukraine dipping into gas deliveries destined for Europe is looming as Naftogaz debt continues to rise: and as winter draws closer and closer. The fabled 'reversed flows' from Eastern Europe are not materialising (predictably) and reserves are bound to be running out faster as coal production is all but shut. Per Vice PM Volodymyr Hroisman, ukraine is facing a shortfall of some 5 million tonnes of coal by the end of 2014 and gas shortages are forecast at 5 billion cubic meters. As the result, Ukraine is now forced to buy coal abroad, with one recent agreement for shipments of 1 million tonnes of coal signed with South Africa.

Electricity exports from Ukraine are suffering too, primarily as domestic production falls and demand rises. In January-August 2014, electricity exports are down 6% y/y

National Bank of Ukraine governor, Valeria Hontareva, has been reduced to talking up the markets by delivering promises that the Government will not default on its bonds and Naftogaz bonds. She had to admit this week that hryvna devaluation has now hit 60% y/y (by other calculations, depending on the currency basket chosen it is just above 40%) and inflation is running at 90%. Recall that on September 2, the IMF assessment of the economy which reflected the updates to risks and latest forecasts. Revised programme forecasts now see real GDP shrinking 6.5% y/y in 2014, but growing by 1% in 2015 and 4% in 2016. Hontareva said this week the GDP can fall by 9% this year alone. End of year CPI is expected to come in at 19% in 2014 (which has now been exceeded by a massive 71 percentage points, based on Hontareva statement) and 9% in 2015 before declining to 6.9% in 2016. Hryvna devaluation vis-a-vis the USD was expected to run around 50.6% y/y which is already too conservative compared to the reality, and by another 6.4% in 2015 falling to a devaluation of just 0.8% in 2016. Needless to say, Hontareva's statement suggests that the IMF forecasts, published only 10 days before she spoke, are largely imaginary numbers.

And the streets are voting for this verdict too: in January-August 2014 net purchases of foreign currency were up 6.6 times than in the same period of 2013, while households' deposits in foreign currency fell 13.3%. This suggests that people are stockpiling foreign currency in the safety of their own homes, rather than in the banks. Consumer confidence latest reading, published last week showed a drop of 10.4 points to 54.7, while inflation expectations rose 2.8 points to 188.7 and devaluation expectations were up 22.1 points to 147.8.

Meanwhile, the Government is yet to catch up with the ugly realities. Last week, the Government approved macroeconomic forecasts for 2015-2017 which show expected real GDP growth of 0.3%-2% in 2015, rising to 2.5-4.5% in 2016. Good luck to them...

None of this is cheerful. The country is economically in a tailspin and the Government is currently unable to address multiple and still mounting problems. New elections for the Rada are due, with effectively a caretaker Government in place. The conflict, currently in a fragile ceasefire, is destroying the economy (not to mention lives and society).

Country political crisis is starting to push the anti-Russian and anti-Eastern Ukrainian rhetoric to new highs (e.g. which is not helping President Poroshenko, who is effectively held hostage by his pre-election promises to bring back Crimea and restore Kiev control in Donbas and the need for pragmatic de-escalation. The President seems to have embraced the latter, but the rest of Ukraine's Government, facing fresh elections, is going on the solo run of beating the anti-Russian drums.

PM Yatsenyuk's ravings are dangerous, although they are also amusing, precisely because they represent blatant political posturing. Last week he went so far as to suggest that Europe cannot exist without Ukraine as a member of the EU (despite the simple fact that no one in the EU ever offered Ukraine a prospect of membership) and that Moscow wants to restore the entire Soviet Union (despite the fact that parts of the Soviet Union today are firmly members of the Nato, while some other former republics are basket cases so poorly run, Russia would have to go bankrupt to accommodate any sort of union with them).

Ukrainian exports to Russia are now expected to fall 35% in 2014 and a further 40% in 2015. And it is not all down to agrifood and heavy machinery trade that is suffering. Take for example insurance sector. In H1 2013, Russian reinsurance companies provided cover for 32.9% on Ukrainian insurance companies (UAH270.2 million). In January-June this year this was down 42% to UAH157 million, with Russian reinsurance share of the Ukrainian market down to 22.1%. Substitute cover was sought instead in Germany and the UK - both markets trading in currencies not offering hryvna any hedging against devaluations, unlike falling ruble. Which means cover is now more expensive.

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