Despite the presidential and parliamentary elections, the year 2019 was characterized by relative stability in the country’s economic situation. The new government had promised to actively implement the necessary reforms. So far, there have been only some limited efforts in the selected areas together with the absence of any systemic vision of modernization and strategic development of Ukraine and its role in the global economy. The results of the new government's actions will be detectable in the next year, yet the worrying tendencies are already obvious. As Ukraine’s economy will be one of the key factors defining the political and the social landscape, the existing trends and possible economic risks should be assessed.
What was remarkable in 2019?
Due to systemic problems in the country, Ukraine has an insufficient amount of investments, a significant amount of non-performing loans, emigration, a deficit of trade balance, debt burden and failure of privatization. They were the main reasons behind the limited economic development of 2019. On the other hand, the country kept macro-financial stability and the process of strengthening of UAH became a new phenomenon which Ukraine has not seen for decades.
In turn, it is worth mentioning the following:
Activities of the National Bank and its monetary policy
The National Bank of Ukraine has demonstrated the high efficiency of its activities in 2019. As a result, the UAH exchange rate is characterized by a certain "margin of safety", inflation is slowing down. The banking sector also showed good results when passing the stress tests of the NBU. In addition, the interest rate has recently been reduced to 13.5%. Of course, the NBU can be criticized for excessive "reassurance", but on the other hand, the market does not like rapid changes. In turn, it is not known what the situation would be if the NBU did not hold everything with an “iron hand”: the consequences could be the opposite to the current stable situation.
Financial policy
The main result was a reduction in public debt due to the cuts in the social sphere and, at the same time, there were successful placements of government bonds. At the end of the year, due to the planning mistakes, the budget was not fulfilled by revenues. At the same time, the budget is still characterized by "traditional" Ukrainian features such as high social expenditures and the lack of capital expenditures, thus making it a "consumption budget", but not a "development budget", with the lack of stimulating factors for development.
The course on deregulation of the economy
The vector for transparency, digitization of services, convenience of tax administration, anti-corruption, development of e-cabinet, “The state in a smartphone” etc. was continued. The processes for broader privatization, legalization of gambling and launching the land market were started. The reform of the labor market rules, de-monopolization and stronger competition, further deregulation of the economy, implementation of measures to promote the Ukrainian exports to foreign markets remain among the main promises.
Energy market
To comply with the EU standards, the Verkhovna Rada supported the draft law “On amending certain laws of Ukraine in connection with the separation of natural gas transportation activities”. Thus, the Naftogaz’s unbundling plan was updated. According to it, the LLC "Gas Transportation System Operator of Ukraine" (100% subsidiary of Ukrtransgaz JSC) will be the new operator. Such an approach ensures the independence of the new GTS operator from Naftogaz and a complete separation of gas transportation activities from gas production and supply.
What awaits Ukraine in 2020?
According to the ICPS`s forecast, under current scenario the GDP growth is expected to be 3.2% in 2020, unless there is a sharp deterioration of the global economy. The inflation is projected to be at the level of 5% in 2020 due to the possible UAH depreciation and higher energy prices.
In addition, the following factors should be mentioned:
The exchange rate of UAH
The UAH is now supported due to the activity of exporters: the good harvest this year ensured good volumes of foreign currency earnings of exporters and their flow into the country's economy. It is unknown whether there will be the same good amounts of harvest in the next year. Accordingly, lower yields will weaken the UAH. Also, a possible slowdown in the global economy may affect the exporters from other industries.
In addition, partly the UAH is supported due to government bonds. Their placement provided the Ukrainian economy with more than $ 3 billion. However, for the most part, it is a speculative factor. If the "mood" of investors changes against the background of any negative news, then this capital will be withdrawn, thereby weakening the UAH.
Moreover, there are "negative expectations" and pressure from the participants of the Ukrainian market (mainly exporters), for whom the strong UAH is disadvantageous. However, as for now, the NBU remains independent in its decisions.
According to the current scenario, the exchange rate of UAH is expected to be at the level of 24.50 UAH per 1 dollar in 2020. In the case of any additional factors, the situation may change diametrically. However, the effect of such changes cannot be definitely called positive or negative: sooner or later, a balance point will be found and the economy/population will be adjusted to any currency rate.
In turn, stronger UAH will have the following effects:
positive: a decrease in the level of labor migration, a slowdown in inflation, a reduction in public debt, a decrease in the dollarization of the economy, cheaper loans, an increase in the salaries of the population in dollar equivalent;
negative: lower budget revenues, less UAH revenues for exporters, losses for those who hold large savings in foreign currency.
"Pyramid of government bonds"
The scenario of the falling "pyramid of government bonds" is possible under insufficient government communication campaign on the background of possible speculations and incorrect government decisions from the point of view of the international practices (for example, regarding Privatbank). This can negatively affect investors' expectations.
The outflow of capital and the fall of the "pyramid" will ruin the country's credit rating. It will be difficult to restore the reputation. In turn, the UAH will suffer, there will be a decrease in the currently small amount of inflow of investments to the country's economy, the government will need to take risky loans with high-interest rates, relations with international financial organizations may stop.
Such a negative scenario is possible due to any shock may lead to a significant outflow of foreign capital and to a depreciation of UAH.
Launch of the land market
The urgent task now is not just to launch the market, but with the maximum benefits for the Ukrainian economy. Moreover, in case of the "wild market", when the interests of citizens and villagers are not taken into account, it may lead to a catastrophic result.
Given the relatively stagnant economic development of Ukraine, assets in the post-crisis period are underestimated. At the same time, the majority will not simply have access to such a market. Moreover, under the conditions of a deformed Ukrainian system of political and economic institutions, the risk of monopolization of the land market by large business groups is quite big. The question of control over the land market also remains unclear.
Accordingly, under such a situation, the launch of the land market will give certain percentages to the growth rates, however, the effect will be insignificant and temporary. According to preliminary estimates, the launch of the land market in the first year will give the Ukrainian economy no more than $ 3 billion.
Legalization of gambling
In the case of all market participants conduct such a business honestly and openly, the effect will be noticeable. Legalization of gambling will be a positive impetus to growth. However, such a scenario is unlikely to happen: the bigger share of the market will be in the shadow and the effect will be minimal. The problem of illegal institutions is also unlikely to be solved. There are doubts about the ability to collect taxes from such businesses and about the financial monitoring system of operators will work properly.
Speaking about the legalization of the gambling business, the problem of social protection will also arise: it is necessary to take into account the possible negative social effect of legalizing such businesses and its expansion. In other words, what is in the first place for the government: the “health” of the nation or extra money to the budget? However, partially there will be a cycle, when the taxes from the gambling business will fill the budget to solve the social problems.
Nevertheless, in order to launch the economy in 2020, it is necessary not only to attract speculative capital, to sell assets, land or to launch a gambling business, but also to create incentives for the development of business and innovative industries. Meanwhile, the government’s desire to fill the budget and to give impetus to GDP growth at any cost is noticeable. In this case, the results will have a temporary effect and will not bring maximum benefits for the country.
Taking into account the above stated, there is a need to distinguish the following scenarios:
According to the basic scenario, that is the most likely, moderate economic growth in 2020 is expected. The government will not make any significant changes or reforms. The Ukrainian economy will continue its stagnant development trend.
In the case of a negative scenario, the year 2020 will be characterized by a struggle of stakeholders and interested parties for the power and influence, while ignoring the interests of society and pushing aside the drivers of the global economy. Poor country management, inappropriate launch of the land reform, the fall of the "pyramid of government bonds", UAH collapse and the probable dissolution of parliament will have disastrous consequences.
A positive scenario may happen in case if the government will demonstrate the independence, teamwork and the ability to learn and gain knowledge to create a unified vision of the country`s development, based on the innovative world trends, creative approaches and the opinion of civil society. Only in such a case the "dream country" is possible.
In the future, it is worth hoping that the government will gain experience, formulate a systemic vision of modernization and strategic development of Ukraine and, nonetheless, will find a balance between a "competent managerial hand" and "wild liberalization of the economy".