The year 2019 has become a difficult one for the Ukrainian economy. However, it brought some pleasant surprises:
– strengthening of the hryvnia against the dollar by 15%;
– increase in GDP growth up to 4%
– decrease in inflation to 5%
Ukraine had the record grain harvest, the largest ever inflow of non-resident funds into domestic government bonds (T-bills), high economic growth, which exceeded 4% in II-III quarters. The average wage expressed in hard currency reached a historical height, crowning all of these positive developments. At present, the Ukrainian economy has a good starting position stemming from the 2019 gains.
In terms of economic growth, the issue lies in the quality of GDP growth in 2019. It was provided by trade, construction, and agriculture. At the same time, the fall in production in industry has taken on a steady nature (six months in a row), which indicates the poor quality of the economic growth last year. As of the bad preconditions for the economy in the coming year, de-industrialization of the economy not only does not allow to count on quality growth, but can also negatively affect the quantitative indicators. Moreover, the fall in the industry has largely affected those sub-sectors that export raw materials and semi-finished products – due to a significant deterioration in the situation on the world markets for steel and iron ore.
The loss of the IMF support and the situation with Privat. The main risk for cooperation with the IMF is Ihor Kolomoiskyi. The state has not yet come into direct conflict with the oligarch, but it is obvious that he is no longer getting what he wants.
Hryvnia exchange rate. An important factor is how long and to what extent the national currency will continue to strengthen. Economists consider the issue too controversial, the Cabinet officials point to a slowdown in industrial production and over 50 billion hryvnia in taxes due to the strengthening of the hryvnia. The National Bank and the foreign exchange market still capture the oversaturation of the currency supply. Business expectations and forecasts of international experts, as well as the indicators set for the State Budget for 2020, let us hope for “stabilization” of the national currency at the currency rate of 27 hryvnia for 1 US dollar.
However, the course is expected to adjust in the next few months. The maximum fortification indicated by bankers is possible up to the rate of UAH 21 per dollar. However, pessimistic forecasts for a sharp devaluation of the national currency are much greater. The problem is that there are enough factors that can affect it. And no one predicts the depth of the real fall, because in modern Ukrainian history, the hryvnia could often fall by three times in a short period of time.
Land market reform. The most unpredictable event of 2020 in the economy is the consequence of launching the land market. The introduction of clear rules for the sale and purchase of land can be a breakthrough and an “economic miracle” for Ukraine. However, there are significant risks in introducing the land market.
So far, at this level, a political factor is very influential – it is used by groups of influence to put pressure on the government. Since the topic of land is sacred for the Ukrainians, there is no quick decision in this area. It is likely that compromises will be found on the phased launch of the land market.
Debts of the state. Another factor that should seriously worry the authorities is the repayment and servicing of the debt. For the years 2020-2022, there is a peak of payments on previous debt. The National Bank notes that in the next 3 years, the government will have to pay about $ 24 billion with interest. Most of this money will again be borrowed from foreign markets. That is why the new government was in such a hurry to resume cooperation with the IMF and sign a new lending program. Despite a large amount of government debt, the NBU positively evaluates the further steps to reduce it and consider the situation quite controllable. Experts also say that the optimism of the regulator can be completely shared, but only in case of rapid economic growth due to structural reforms. Unfortunately, so far, Ukraine is not only unable to refuse from external borrowing (the IMF and the purchase of government bonds by non-residents), but also risks becoming even more dependent on creditors. Therefore, the risk of default, as in previous years, remains relevant even with the new 2020 year. However, the debt burden has been declining and the debt-to-GDP ratio has fallen from 80% to 52% of GDP over the past three years.
Migration. The incomes received by Ukrainian workers abroad has increased from $ 5.2 billion in 2014 to about $ 12.8 billion in 2019. More than $ 2.4 billion goes to Ukraine in the form of private transfers, which probably come from the income of illegal workers and Ukrainians who changed citizenship. There are two important consequences. First, the export of people and labor from Ukraine has become a significant component of the balance of payments, since it already provides foreign exchange earnings equal to almost a quarter of the income from exports of goods and services. The dynamics of indicators indicate that it is much easier for a country to export people than it is for the products of the economy.
Secondly, now the balance of payments and the whole economy of Ukraine depend on the economic dynamics of the countries in which its citizens work. Ukrainians work mainly in EU countries, whose economic situation is very uncertain. According to the IMF, the Euro area economy is expected to accelerate from 1.2% in 2019 to 1.4% in 2020, but this is extremely unconvincing given the dynamics of a number of macroeconomic indicators in the countries concerned. The economy of Poland has started a slowdown, which is likely to continue in 2020. If crisis trends increase in the world, then the EU countries are likely to be among those who will suffer. Thus, the growth of the EU economy has become a matter of economic security for Ukraine.
The share of the Ukrainian economy in the global dimension is small – at the end of 2018 it amounted to 0.29% (GDP according to the PCA, according to the World Bank). It means that Ukraine is very dependent on the state of the international economy, especially since the Ukrainian economy is not only “small” but also “open” (the share of both exports and imports is slightly below half of GDP).
The world entered the 2019 with considerable concern about the onset of the global economic crisis. These expectations did not materialize. But many experts have moved them to 2020.
What are the major triggers for the global economic crisis that could cause a crisis? The IMF predicts that global GDP growth will accelerate from 3.0% in 2019 to 3.4% in 2020. However, world trade growth rates have been steadily declining since early 2018. They have been negative since June 2019, up from 2.1% in October (the least since the 2008-2009 crisis). Along with world trade, industrial production is also slowing down.
The trade war between the US and China has been put on hold, after a series of exacerbations in 2018-2019. The duties imposed had a serious effect (just during the trade war, the average US tariff for Chinese products increased from 3.1% to 21%, China for the US – from 8% to 21.1%). However, the US has not yet decided to impose the announced “destructive duties” on China – on electronics and other household goods (their share is 80-90% of all foreign suppliers in the US).
Currently, a temporary (two-year) trade agreement is planned to be signed. Formula of the agreement: the return of tariffs to the level at the end of 2017, the reduction of China’s barriers to foreign trade with the United States, the negotiation of a permanent trade agreement. China will increase imports from the US by about $ 100 billion a year.
It is possible that on the eve of the presidential election, Trump will go to a new round of confrontation – in the struggle for the votes of Americans, many of whom are losing revenue because of the increasing imports of products from China. But if that happens, it will not be before the start of autumn, and therefore it will not provoke a full-blown crisis in 2020.
The Brexit situation is also close to completion – with the Conservatives winning the parliamentary elections, the likelihood of a “soft” Brexit has increased dramatically. In addition, Europe is already quite calm about “divorce” with Britain. Thus, in Europe throughout 2019 business activity declined – stagnation in the German industry, high debt load in Italy and difficult budgetary situation in Spain affected. But all this has happened several times in the recent past, and each time they found a way out of a problematic situation.
Monetary policy of the leading Central Banks of the world overcame the “paradox of zero rates” – in the US, the rate was mobile on both sides, in the eurozone the economy was adjusting to extra-low rates, and so can Japan. Most importantly, monetary policies pursued by key global CBs are, to one degree or another, working successfully to support economic growth.
China is expected to slow down its economic growth, which the PRC government will tackle by easing monetary policy and increasing government investment. But expectations of a slowdown in China are no longer as alarming as they were a few years ago. Even if there is no sharp escalation of the US-China trade conflict, the magnitude of the slowdown in China’s economy may be quite insignificant.
Election in the United States. No less important factor on which the pace of development of the domestic economy will depend on is the elections in the USA, as they will determine the long-term strategy of the country’s development and, accordingly, relations with Ukraine.
In general, the external environment does not currently appear to be aggressive for Ukraine’s economy. Thus, macro-financial stability will depend on the success of solving the debt problem – according to the current forecast of the Ministry of Finance for repayment and servicing of the national debt in 2020 it is necessary 400.7 billion UAH (231.5 billion UAH for domestic debt and 169.2 billion UAH for external debt). We suggest that the Ministry of Finance has a plan on how to deal with this (by the way, the implementation of this plan can be judged by the effectiveness of the policy on government bonds, which has been conducted the ministry since 2019).