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Eco Emerging

Capped growth
01/25/2022 • By Stéphane COLLIAC

The Ukrainian economy has suffered an accumulation of external and domestic shocks: the pandemic (vaccination rates are still low), the ongoing geopolitical risk, and domestic political tensions. Adding to these factors, inflation has accelerated over the past year. However, the Covid-19 crisis has been much better absorbed than was the case for the crises of 2008 and 2014. The current account balance has recovered and foreign currency reserves have increased, thanks in particular to higher commodity prices (cereals and metals). International support (mainly from the IMF and European Union) provided the required complement, allowing fiscal support to the economy. However, the country remains exposed to a sudden stop of capital flows

Eco Emerging

Taking advantage of a favourable environment
04/15/2021 • By Stéphane COLLIAC

The country weathered the difficulties of 2020 relatively well, notwithstanding the recession that Covid-19 produced and the drying up of private capital inflows. Thanks to the improvement in the terms of trade, the current account surplus was sufficient to balance the existing gap. Over recent years, Ukraine has been able to improve its fiscal management, which helped to secure the support of international financial institutions. The challenge for the months ahead lies in a resumption of capital inflows and in the planned reforms to encourage investment and increase potential growth. It will be important to keep an eye on reforms in the banking sector, which relate both to the consolidation of the sector and to the improvement of the prudential and supervisory framework.

Eco Emerging

You reap what you sow
07/22/2020 • By Stéphane COLLIAC

Ukraine is usually quite prone to boom bust cycles. Yet high volatility has not allowed to stabilize growth towards a higher level, and fickle capital inflows have reinforced the importance of funding from foreign institutions, notably from the IMF and the European Union. Such official financing, coupled with the structural progress it has made in recent years, seem to have helped the country to cope with the Covid-19 crisis, at least for the moment, with fewer negative financial consequences than initially feared. Strong foreign demand for Ukraine’s grain, lower oil prices and the foreign financing are all favourable factors that have helped the country weather the crisis, and raise hopes for a rapid economic recovery once the Covid-19 crisis is over.

Eco Emerging

Favourable conjonction
01/27/2020 • By François FAURE

Ukrainian growth accelerated rapidly in the first nine months of 2019, driven notably by the agricultural sector and household consumption, the latter being largely stimulated by borrowing. The appreciation of the hryvnia (UAH) triggered a sharp drop in inflation, which facilitated greater monetary policy easing. In the short term, monetary policy support should offset the impact of the global economic slowdown, which has already eroded industrial activity. At the same time, the announcement of a new IMF agreement is bound to reassure foreign investors. The central bank will have to deal with a classic dilemma: it needs to ease monetary policy to curb portfolio investment inflows, but doing so risks triggering a credit boom.

Ukraine is a developing market economy with a population of 42 million (excluding Crimea) and GDP of $134bn in 2019. It is relatively rich in mineral resources (coal, iron ore, uranium) and enjoys significant agricultural potential.

The country has experienced several political and economic crises over the past fifteen years, as in 2013-2014 when a political shift towards the West was followed by a loss of control over the Crimean peninsula and military conflict with Russia-backed separatists in the Eastern territories. The economy has recovered from the deep recession observed in 2013-2015 but remained quite fragile, particularly since banking consolidation is still not fully achieved (non-performing loans were still at 48.4% of gross loans in December 2019).

Despite key weaknesses and a recession that was not avoided (-4.2% in 2020), Ukraine weathered the Covid-19 shock quite successfully since the country did not suffered from a sudden stop of capital flows. Agricultural exports acted as a buffer, since foreign demand was strong during the lockdowns. Moreover, the country has managed to ease its fiscal and monetary policies timely, a positive factor that was allowed by lowering public and external debt ratios during the years before the outbreak.

Nonetheless, the Ukrainian economy is exposed to an unstable political and geopolitical environment. The Zelenskiy administration, which enjoys a majority in the current parliament, has continued cooperation with the IMF, securing a new deal which was crucial for Ukraine to access financing from other multilateral and bilateral lenders as well as global markets.