West compliments Ukrainian economy
One of the world’s largest banks, JP Morgan, has announced its forecast for developing markets. Regardless of the parliamentary elections in Ukraine, this country is listed in the category of countries of “positive expectations”. According to the JP Morgan market experts, Kyiv’s financial policy will not change much after the elections, and its foreign debts will be paid without delay. To foreign investors this conclusion means above all a signal of lower political risks. To Ukrainian enterprises the news from JP Morgan could become a weighty argument in their negotiations with foreign moneybags. It also gives the State Property Fund a good measure of optimism on the eve of big tenders for the denationalized regional power companies and Ukrtelekom. Never before has this country been given such a favorable evaluation of its economic situation during the hectic pre-election period. Yet, its financial stability looks rather ambiguous, especially with the imminent change of its parliament.
This year Ukraine will pay UAH 12.5 billion [$2.3 billion] to foreign creditors, as the Finance Ministry announced earlier. A little over half the sum will go to debt payment proper while the rest will be paid as loan interest. Although the national budget was underfinanced in January-February, Finance Minister Ihor Yushko believes that there are no serious dangers to the treasury. Possibly the government will approach the parliament by summer with a proposal on sequestering the national budget. Most probably, the cutting of budget spending will involve only the so-called innovation programs. According to the parliamentary Budget Committee, the Cabinet of Ministers is already trying to agree with lawmakers which particular expenditures should be cut. But the latter, preoccupied by the coming elections, seems to be unable to tackle this issue soberly. This problem, however, is seasonal. A sequester of the budget the government’s way will bring no surprises. As a rule, shortly after elections the lawmakers are very tractable about the president’s and government’s initiatives, and the share of pie-in-the-sky in their decisions is very small.
Cadre risks are more serious. It is expected that not only the bulk of the cabinet’s staff will be replaced, but also the National Bank’s, and these expectations are being actively discussed by the bank’s management. It is highly likely that the export lobby [major Ukrainian exporters who have great influence in Verkhovna Rada] will try to put their man in the post of NBU governor. Now, as prices on foreign markets are falling and the tax experiment inside the country is as good as over, the metallurgical giants can only hope for hard-currency incentives. Devaluation would play into the hand of exporters, but so far they have not succeeded in making the government, with which they have considerable influence, do what they want. It was under pressure from exporters that Prime Minister Anatoly Kinakh initiated the agreement between the Cabinet of Ministers and the National Bank on coordinated activities in the interests of industrial producers. Yet, the hryvnia remains stable on the hard currency market, owing largely to NBU governor Volodymyr Stelmakh who has never concealed his favoring the policy of a strong national currency.
The issue of foreign loans to Ukraine remains unclear. Fresh from his unsuccessful talks with the IMF in Washington, Vice Prime Minister Vasyl Rohovy has said that the government is not in bad need of money borrowed from abroad. But it has been included in the national budget which means that the cabinet will have to comply with the IMF’s demand — to reimburse nearly $400 million of the VAT to exporters. JP Morgan experts sound confident in their forecast that the Ukrainian government will solve this problem soon and that most of exporters will be satisfied. It should be noted, however, that this year’s budget does not provide for complete reimbursement. The government’s latest package of steps “to improve the administration of theVAT” envisions a more rigid tax policy in this country.
Thus, the main factor of the country’s stable financial condition, growth of production, faces certain risks as well. If after the parliamentary elections the government continues to patch holes in the budget by increasing the tax pressure on producers, production growth could well slow. In fact, the turndown is already visible, which logically demands from the government a new set of measures to maintain the positive trend. The country’s financial condition and economic growth will now depend on which of these two strategies the government will choose. In any case, one would hope the JP Morgan forecast turns out to be correct.
