Unrelenting Optimism: Hoping for a Ukrainian Miracle

By Yuliya Sobko, Head of Financial Communications and Investor Relations, The PBN Company, Kyiv

From the outside things have seemed particularly grim in Ukraine of late, with a combination of pre-election politicking and energy issues dominating international headlines. But in the midst of the severe economic slump Ukrainians are strikingly optimistic – about economic recovery (we hope we see production bottoming out in August) and the ability to cope with any policy mistakes that may come our way.

Ukrainians are stubborn survivors and optimists, and the government is more optimistic than ever. Ukraine’s Economy Minister Bohdan Danylyshyn, upbeat about the country’s future economic prospects, recently said that Ukraine has the resources to prevent the country from defaulting on its debts. “We have got the crisis under control and, little by little, Ukraine is overcoming it,” he offered as reassurance.

The draft State Budget, submitted to parliament on September 17, is also infected with bullish forecasts. The government expects GDP to grow by 3.7% in 2010, with inflation at 9.7% (compared to 1.5% GDP growth and 13.4% inflation forecasted by the World Bank). Based on these projections, the UAH 1.27 billion budget foresees a 19% increase in revenue and a 21% rise in expenditures compared to the 2009 budget (and the 2009 budget was based on rather upbeat forecasts as well). The budget deficit is predicted to increase by 49.9% in 2010 to UAH 46.7 billion, while UAH 4.5 billion is needed to cover credits and UAH 11.7 billion for credit arrangements. The fly in the ointment for the government? The fractious political situation makes it unlikely that the budget will be passed before the January elections.

Ukraine has been relying almost entirely on international institutions like the IMF to implement the reforms needed to kick-start recovery. Very little progress has been made, however. President Yushchenko has expressed his dissatisfaction with Ukraine’s failure to carry out the reforms in the IMF agreement, and former Finance Minister Ihor Mityukov has warned that Ukraine won’t be able to maintain an exchange rate of UAH 8.00-9.00 per $1.00 without IMF support.

However, the IMF has (for better or for worse) been unbelievably flexible with regard to Ukraine’s failure to comply with the requirements set out in its $16 billion bailout package. The IMF review to release the next $3.5 billion tranche is in November, and Ukraine has not yet implemented gas tariff reforms or a bank restructuring and recapitalization program. It has persisted in manipulating the exchange rate and failed to cap spending or proceed with tax and pension reform. And President Yushchenko has failed to push some of his attempts to curb spending through the legislature – parliament overrode his veto to approve the full program of spending for the Euro 2012 football tournament.

Seen in these terms, the situation on the ground is rather grim, but Ukrainians continue to remain hopeful. The World Bank recently confirmed a $400 million loan to revive and stabilize Ukraine’s banking sector and is discussing a three year investment program in roads and road safety.

But can more debt really salvage the situation? Until the government becomes a more active player in facilitating recovery, international institutions can only accomplish so much. And with political stalemate likely to continue until the election, Ukrainians can only cross their fingers and hope for the best.

Possibly related posts:

1. IMF Releases Third Tranche of Ukrainian Loan
2. Ukrainian Consensus in the Offing?
3. Celebrating Another Victory: IMF Approves Second Loan Tranche for Ukraine
4. Ukraine’s IMF Bailout
5. Finding a Way Through the Energy Crunch