Alexander Paraschiy
Head of Research
[email protected]
+38 044 391 55 77

Economy 2016: Perfect calm after the perfect storm

To the Ukrainian economy ceased to be a leaky sailboat, one should not only stop closing off the loopholes with IMF loans, but also start paddling

Many officials compare recent developments in Ukraine with a perfect storm. Indeed, our ship rocked on waves, it took in water and could swim to the bottom any time. But it has fought out a storm. Thanks to efforts of our international partners that stopped the spread of cracks in the hull. Due to assistance of the International Monetary Fund, that almost at the last moment provided resources for patching the currency hole. With the help of volunteers and people concerned, making the crew take more drastic measures, and often showing by example how to deal with the elements.

And now, the storm seemed to settle down, and the ship survived. But what's next - whether the ship can sail, and whether it will chose the right direction? That is not a fact. After all, our ship is not a modern liner, it is a sailboat, for which, as is known, the flat calm sea is not better than a heavy storm.

Why sailboat? Because the economic movement of our country heavily depends on the favorable wind of resource market prices. Our strongest years in terms of economic growth, fell within the resource boom of the mid-"zero" and early "ten" years.

Here we seem to enter that calm water - calm on the foreign resource markets. Prices for steel, iron ore and grain show no growth. And this calm is very dangerous for us. First, it is not very noticeable (yet everyone keeps saying that we are moving toward the goal). Second, it is highly annoying (and not only for us, but also for our external partners), indicating the failure of the crew.

During the storm, rescuers rush to us, offering materials for patching holes (the IMF, the US, EU and other official creditors). But strengthening of the ship's hull cannot make it float. Moreover, sooner or later, our rescuers will raise an invoice for their services, and if our ship fails to reach a destination port by that time and sell its precious cargo, we will dismantle it.

Those conditional $ 37 billion we would get from the IMF and its partners under the financial assistance program in 2015-2018, it will close off the loopholes only. Since March 2015 we have "received" $ 12 billion under this program (including deferral of Eurobonds, which we did not redeem this year). Did you notice? Likewise, we may miss another $ 13 billion, "scheduled" for 2016, $ 7 billion payable to us in 2017 and $ 5 billion - in 2018. But in 2019, we will have to refund the money.

To pay debts, we need to master floating in calm waters. At a minimum, we need to start paddling that is to use the inner strength. Yet we are not so hot when it comes to paddling. Domestic consumption, which was the engine of economic growth in the boom years, will not save us. The following year will show minor, if any, growth of domestic consumption: real incomes would unlikely to rise, and the only hope is restoration of consumer lending. Prospects of investment consumption, which should accelerate our ship in the near future, are poor in 2016. Our enterprises will hardly reinvest their profits (as no profit is expected); long-term financing is available for a few companies; and there are no attractions for the private foreign capital (or for the Ukrainian money deposited abroad). Just look at the investment ratings of Ukraine. So it looks that the next year we will, at the best, demonstrate very modest economic growth - 0.6%, according to our forecasts.

But it cannot last long - the time given to overcome the difficult situation (only three years, according to the IMF program) will elapse very quickly. And if fail to set up the reliable engine (that is, to carry out the reforms that can attract domestic and foreign capital, and make it work effectively for the national good), we will not reach our destination port. And then we have to stir up another storm to somehow clear before the outer world for our failures.