Ukraine – Macroeconomic Situation in September 2015 by SigmaBleyzer private equity firm and The Bleyzer Foundation

Executive Summary

 The ceasefire in Eastern Ukraine has been holding for several weeks and pro-Russian rebels have declared their intention to cancel their own local elections originally planned for mid-October. These developments give the expectation that the conflict will be “frozen” at current positions. This may permit the rest of the country to move forward on economic and social matters.

 With the support of civil society and international institutions, Ukrainian authorities are accelerating implementation of its economic and social reform agenda. Numerous corruption cases by government officials were brought to public attention and criminal investigations were initiated. However, the pace of structural reforms is still below the expectations of Ukrainians and international observers. The reforms, particularly on corruption, are considered insufficient to weaken the influence of vested interests that wish to maintain the status quo.

 High-frequency monthly production data shows that the pace of output decline has slowed since May 2015. Industrial production declined by -5.8% yoy in August, a lower decline compared to previous months: -13.4% yoy in July, -18.0% yoy in June and 21% yoy in May. The August declines in industrial output were widespread affecting almost all subsectors, but with larger declines in consumer goods.

 The consolidated fiscal budget continued in surplus during January-August, due principally to large increases in budget revenues induced by inflation and the depreciation of the national currency.

 Inflation in August continued to decelerate, but at a slow pace. In fact, CPI growth decelerated from its peak of 61% yoy in April to 58% yoy in May, 57% yoy in June, 55% yoy in July, and 52.8% in August. It is expected to decline further to 45% by the end of the year.

 The NBU continued its soft monetary policy in August, lowering the policy interest rate by 5 percentage points to 22% starting on September 25th. It also introduced changes in the procedures for the provision of liquidity loans in order to facilitate migration to inflation targeting by the end of 2016. Furthermore, due to the relative stability of the FX market (with a FX rate of 21.5 UAH/USD at the end of September), the NBU started to remove administrative restrictions that it introduced last year. In order to speed up the replenishing of international reserves, the NBU returned to the practice of preannounced FX auctions.

 In August 2015, the current account of the balance of payments continued to show a surplus, though it was lower than in July. The August current account surplus amounted to USD 60 million. The NBU reestimated the January-August current account deficit at USD 133 million. Along with a surplus in the financial account of USD 444 million, these surpluses allowed the National Bank of Ukraine to accumulate USD 2,163 million in gross international reserves, which reached USD 12.6 billion at the end of August.

 Following the August 24th agreement with Ukraine’s main external creditors to restructure about USD 18 billion of its public external public debt, the government offered to exchange securities due in September and October 2015 with a note maturing in 2019. This new offer should meet the requirements of half of the remaining bondholders, who are now likely to approve the deal. The bondholders will be voting on the deal on October 15th .

 The issue regarding the USD 3 billion bond held by Russia is still outstanding with the Russian Ministry of Finance, reconfirming that Russia would not participate in the bond restructuring and is prepared to go to litigation if not paid by December 2015.

Read more: Ukraine – Macroeconomic Situation_September_2015

The “Ukraine Macroeconomic Situation – September 2015” analytical report prepared  by Oleg Ustenko, Djulia Segura, Valentyn Povroznyuk, Edilberto L. Segurathe SigmaBleyzer private equity firm, and The Bleyzer Foundation (TBF), Kyiv, Ukraine, has been released for publication.

kiev.office@sigmableyzer.com.ua