Previous Quarterly Editions
Expropriation Risk: 67 64 64 62 Political Violence Risk: 38 36 36 34 Terrorism Risk: 36 38 38 36 Exchange Transfer and Trade Sanction Risk: 78 76 74 70 Sovereign Default Risk: 65 65 62 62
TREND ▼ OUTLOOK ▲
Following the stunning victory of actor and comedian Volodymyr Zelensky in the second round of the presidential contest in April, in which he received three-quarters of the vote against incumbent Petro Poroshenko, Ukraine has entered a new period of political turbulence. Having run without a party, Zelensky has no representation in the national parliament, the Verkhovna Rada (VR), where Poroshenko retained a majority at the head of a functional coalition. So long as the existing alignment between the Petro Poroshenko Bloc (BPP) and the People’s Front (PF) remains in place, the VR could resist any and all of the incoming president’s legislative initiatives. Zelensky’s response to the situation was to announce on taking the oath of office on May 20 that he was dissolving parliament immediately. The country’s election commission then set new parliamentary elections for July 21, only for parliament to declare Zelensky’s move ‘unconstitutional’ and reject dissolution. For good measure, it also rejected the president’s first legislative proposal, which would convert the electoral system completely to proportional representation. There is concern among parties in the VR that Zelensky’s support could be quickly mobilised into a new party and develop a real presence in the legislature if elections are held before his favourable rates are tarnished by time in office. Under any of the possible scenarios, the next few months promise to be both unexpected and bumpy for the new presidency, especially in view of Zelensky’s lack of political experience. However, as his supporters point out, he is not the first political novice to become a president precisely because of his lack of experience, and his vagueness on policy issues during the campaign gives him substantial flexibility on substantive issues going forward. His main problem is likely to be efforts by his opponents to portray him as in the pocket of oligarch Ihor Kolomoisky, and his appointment of Kolomoisky's lawyer as his chief of staff will not help. Perhaps most importantly, Zelensky inherits an economy in recovery, although last year's growth rate of 3.5%, up from 2.1% in 2017, was mostly due to maize, sunflower seed and little else. He will soon have to decide whether the country can really afford to derail the austerity measures that have brought it credibility abroad and some stability at home, even though a pledge to do so formed a central plank of his presidential campaign.
TREND ▼ OUTLOOK ►
Government efforts to bring telecoms giant Ukrtelecom back under state control have been dealt a new and probably final blow that is likely to end the overall project to renationalise assets sold by the Yanukovych regime. In February, an economic court of appeal rejected an appeal by the State Property Fund against the earlier court decision that rejected the Fund’s original demand to cancel the 2011 agreement under which Ukrtelecom was originally privatised. Moreover, the state is now at risk of losing ownership of Privatbank, a leading commercial lender that was nationalised during a bailout in late 2016 specifically to avoid bankruptcy. In April, an administrative court ruled that the Privatbank nationalisation had been conducted unnecessarily and was therefore unlawful. This means that the bank could be returned to its former private owners, who happen to include the oligarch Ihor Kolomoisky.
Despite the rise in political tensions around the election, the presidential campaign saw surprisingly few street protests or demonstrations. Instead, the political confrontations and disagreements mainly took place online. For a short period in February, the police battled a paramilitary group called the National Corps that was attempting to use violence to disrupt pro-Poroshenko rallies across the country, but the threat lasted for less than three weeks. Overall, since the demise of the Mikheil Saakashvili-led opposition movement in mid-2018, political street activism in Ukraine has declined. However, this trend could easily be reversed in the event of a serious struggle between President Zelensky and the VR.
The threat of terrorist attacks in Ukraine, already relatively low, has decreased further in recent months. As a phenomenon, terrorism came to Ukraine only in 2014 with the war against Russian-backed separatists in the east. The most recent major incident in which Ukrainian authorities suspected Russian involvement was in October 2018, when a series of explosions hit a munitions depot near the northern city of Chernihiv.
The hryvnya is enjoying an unusually long bout of stability, having avoided its usual weakening during the winter months while remaining relatively unaffected by the extraordinary presidential campaign. Aside from a generally balanced payment situation on the current account thanks to growing exports and active borrowing abroad, this stability may owe much to the generous election-related inflows of foreign currency into the financial account. If so, this suggests a downturn in the second half of the year. However, the central bank, now one of the country’s most respected institutions and highly praised by the IMF, is well placed to mount a defence. Inflation ended 2018 at 9.8%, substantially above the bank’s target of 6% but below the 14% recorded in 2017. The bank expects that its anti-inflation policies will bring the rate down further to 6.3% by the end of 2019. In April, Ukraine expanded its embargo on imports from Russia, with Russia responding by banning exports to Ukraine of coal, oil and petroleum products from June.
TREND ► OUTLOOK ▲
Ukraine’s debt situation remains challenging but not unmanageable. After spending more than 1.3 billion dollars on external debt obligations in the first quarter of 2019, the government and the central bank need to pay a total of about 4.5 billion dollars in debt remittance and servicing over the rest of the year. These payments peak in September, when around 2.2 billion dollars comes due. So far this year, the government has limited its borrowing to issuing a 350-million-dollar Eurobond in February. What happens next depends largely on persuading the IMF to release another tranche under the 3.9-billion-dollar stand-by credit line opened in December. The first tranche of 1.4 billion was disbursed quickly, but the second one depends on the Fund’s assessment of Ukraine’s progress.
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