One of the features of human life is that over time what we consider to be a crisis fades as we require larger doses of bad news to have the same impact. Something of this sort has been happening in Ukraine as the situation rumbles on with fighting continuing. We are supposed to have the Minsk ceasefire but I note that some wag has described that as Ukraine with the “cease” and Russia with the “fire”. As I pointed out on the 1st of June Ukraine finds itself in an Orwellian style nightmare trapped between the super-states of Europe and Russia in a toxic mix. Quite how any sort of economy is functioning is a moot point. Back then even the IMF struggled to find any sort of optimism.
Accordingly, the mission has revised down growth projections for 2015 to -9 percent and projects end-year inflation at 46 percent.
A grim forecast although somehow out of that the IMF managed briefly to say that things were perhaps “on track”.
In recent months, signs that economic stability is gradually taking hold are steadily emerging.
How is that stability going?
Briefly yesterday’s industrial production data backed that up.
In July 2015, Ukraine has recorded growth in the industrial production of 3.4% compared with the previous month.
Not quite so good though was the annual comparison.
July has seen a slump of 13.4% in the rate of decline for industrial production year-over-year
Or for 2015 so far.
Industrial production indices for January-July 2015 were 80,5%as compared to the relevant period of 2014
If we factor in that production fell by 0.5% in 2012 and 4.3% in 2013 followed by 10.1% in 2014 we see that the situation certainly qualifies to be called a depression.
This was backed up by last weeks release on economic growth.
The GDP for Q II, 2015 as compared to the relevant quarter of 2014 (at the constant prices of 2010) comprised 85,3%
Putting this into context
It is important to realise that Ukraine is a relatively poor nation as somehow the economic boost that many ex-eastern bloc nations saw when the Berlin Wall fell by-passed the Ukraine. From Trading Economics.
The Gross Domestic Product per capita in Ukraine was last recorded at 2081.04 US dollars in 2014. The GDP per Capita in Ukraine is equivalent to 16 percent of the world’s average. GDP per capita in Ukraine averaged 1866.79 USD from 1987 until 2014, reaching an all time high of 2826.10 USD in 1989 and a record low of 1123.40 USD in 1998. GDP per capita in Ukraine is reported by the World Bank.
As you can see the 1990’s brought not economic prosperity but a dreadful depression from which there was a recovery but I note that in 2014 per capita GDP was 26% lower than the 1989 peak. Not many countries have 1989 as their peak and the country that makes me think of is Japan with its lost “decades” but of course Japan has done a lot better than this. Even worse we know that 2015 has been a lot worse than 2014.
Whilst the US Dollar is a type of ersatz currency in Ukraine there are dangers in using it for comparisons but these are swamped by the scale of the numerical decline here.
I am reminded by comments to this blog that at least some Ukrainians are able to get by due to its agricultural resources and undertake a type of subsistence farming. Let us hope so. The allotment debate in the UK has led to an estimate that 250 square meters of land is enough to feed a family of fours. The only problem is that it reminds us of life from past centuries.
What does the IMF think now?
Those who recall the early days of the Greek bailout will feel a winter chill down their spine as the read the bit below.
The authorities have made a strong start in implementing the program.
After all so supposedly did Greece and we know what happened next! Actually the 9% fall in GDP growth expected by the IMF for 2015 does mirror Greece although at least this time the IMF is not hiding it.
Amidst the analysis there is one factor which troubles me. I have written before that an agricultural and commodity nation should not have run the balance of payments deficits that it has and the news on that is not good.
The current account deficit is expected to widen to 1.7 percent of GDP in 2015, compared to 1.4 percent of GDP at program approval.
There are ameliorating factors such as the ongoing falls in commodity prices but it is also true that the economic depression seen should have cut imports considerably too. The IMF started a new program in March but it has been involved on and off in Ukraine for some time and the picture on what used to be its main stomping ground pre Euro involvement is not pretty.
What about inflation?
The IMF is sanguine on this front.
The 2015 inflation has been revised upwards to 46 percent at end-2015, compared to 27 percent at program approval….. Inflation is projected to recede quickly in 2016 to around 12 percent as the one-off effects subside and economic stabilization takes hold.
However with developments in China in recent weeks the situation has returned to potentially haunt Ukraine. The Ukrainian Hryvnia fell by over 4% against the US Dollar last week and it now takes just over 22 of them to buy one US Dollar. Sadly the weakest are always affected the most at times like this. Whilst this is a long way from the peak of 33+ in March it does reignite worries.
Also whilst the IMF uses the word “disinflation” I am not clear that is a valid way of describing a country which even next year is forecast to have 12% inflation in what is mostly otherwise a 0% inflation world.
Here is something else which is out of kilter with trends in the rest of the world. From the National Bank of Ukraine.
On June 24-25, 2015 meeting the members of the Monetary Policy Committee decided to keep the NBU discount rate
unchanged at 30%.
So the price of relative exchange-rate stability was an increase in official interest-rates to 30% which begs a point would they have preferred a 30% lower exchange-rate? Of course as to the stability point as issues emerge from China then that goes into the “Definitely Maybe” category.
What about the debt?
The national debt of Ukraine is not a problem on the scale of Greece but a feature of it poses worries.
public debt will exceed 90 percent of GDP , partly due to exchange rate depreciation and bank recapitalization needs.
It owes money in foreign currencies and not only has the cost of servicing this ballooned with the fall in the Hryvnia but so has the capital owed. In total it looks as though Ukraine’s total debt in foreign currencies will reach 150% of GDP. If you are looking for the case for what is euphemistically called a “debt restructuring” that is it in a nutshell.However if you translate the IMF-Speak below it is still in the distance.
At the same time, restoring debt sustainability will require the completion of a debt operation consistent with program objectives.
Even in the world of sport it would appear that things are not going the way of Ukraine as Sergey Bubka lost the IAAF Presidential vote to Sebastian Coe. Also I note that Shakhtar Donetsk are being described as a football club in exile. As to the economy it has seen a sharp fall from levels which were already internationally low. So the stability that the IMF likes to talk and write about needs to be reviewed in that light. Once you have fallen to the bottom of a crevasse you may well then be stable but you may be in bad shape from the fall.
Added to this I have regularly warned about the danger to the finances of the IMF itself. It is seeing trouble in Greece and I think its review of Ukraine could easily go down a similar path.
Under the baseline, Ukraine’s capacity to repay the Fund remains adequate
Remind us,whatever happened to the baseline in Greece again?
Also one gets insight from all sorts of news including this from Carlsberg today.
The Ukrainian market worsened even further and declined by an estimated 17% as a result of the deteriorating macroeconomic climate as well as significant price increases to cover inflation.