No Quick Fix for Ukraine With Limp Revival Next After Recession

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(Bloomberg – bloomberg.com – Agnes Lovasz – July 29, 2015)

Ukrainians hoping the trough in their 1 1/2-year economic slump will usher in a rousing recovery are likely to be disappointed.

The foreign demand that powered growth after the last recession in 2009 is largely absent. At home, a war with pro-Russian separatists has decimated industry, ravaged government finances and sunk the hryvnia. While the contraction may have bottomed mid-year, expansion probably won’t top 2.5 percent before 2019, according to Goldman Sachs Group Inc.

“Domestic financing constraints and post-conflict economic effects are likely to constrain the country’s medium-term growth outlook,” Andrew Matheny, a Moscow-based economist at Goldman, said this month in a note.

Statistics office data due Thursday or Friday will show gross domestic product plunged 16.7 percent from a year earlier in the second quarter, according to a Bloomberg survey. On a quarterly basis, Kiev-based investment bank Dragon Capital agrees that the economy may have bottomed out during that period, though the government only releases annual figures.

Like Goldman, Dragon sees a “muted” recovery. And there are plenty of limits on investment from within Ukraine: fiscal tightening under a $17.5 billion International Monetary Fund rescue, destruction of factories in the conflict zone and a loss of exports to Russia.

“With the global economy growing only moderately now, Ukraine’s near-term recovery prospects hinge on the rather scarce domestic resources,” Dragon’s chief economist, Olena Bilan, said last week in an e-mailed note.

Can the government juice up the revival? Only if it speeds efforts to revamp Soviet-era bureaucracy, stamp out graft and improve the business climate, according to Goldman’s Matheny. As long as those overhauls drag, foreign investment that would help stoke economic expansion will remain “anemic,” he said.

“Ukraine needs much deeper, swifter and more radical reforms in order to attract the foreign investment needed to raise the country’s growth rate,” Matheny said.

Article ©2015 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2015-07-29/no-quick-fix-for-ukraine-with-limp-revival-next-after-recession

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