Business New Europe: Ukraine on the verge of financial collapse

(Business New Europe – bne.eu – August 29, 2014) Ukraine reported terrible economic results this week leaving some commentators to say that the country is only weeks away from running out of money entirely. The results also suggest that the IMF sponsored rescue package plan was overly optimistic and that its standby agreement will have to be renegotiated.

Ukraine’s GDP fell by 3.3% year-over-year in January-July 2014 and it could accelerate to 6% by the end of the year, First Deputy Economic Development and Trade Ministry of Ukraine Anatoliy Maksiuta said reports Interfax.

“We expect that this year real GDP will be minus 6%. These are the indicators of the present situation,” he said at a briefing in Kyiv on Thursday. “One should understand that the situation is developing and it could change upwards or downwards,” he said.

GDP fall as well ahead of the governments own 3 to 4% for that it predicted at the start of the year and also beyond the 5% for that the IMF was predicting. Inflation in 2015 is also running higher than was hoped and will remain at 8.7-9.8%, and the deficit of Ukrainian national budget will stand at 3% of GDP, Masiuta added.

“As for consumer prices – this is 8.7-9.8%, and industrial prices – 10.6-12.3%, and the budget deficit – around 3%,” he said at a briefing in Kyiv on Thursday.

With the countries hard-currency reserves down to less than two months of import cover the economic situation in Ukraine is becoming dire. The government recently called on the IMF to concertina its next two payments to the government and also to increase the size of the overall package from the $17 billion to be paid out over two years that had been previously agreed.

Eastern Europe observer Mark Adomanis tweeted on Thursday: “Ukraine has almost no foreign currency reserves, huge pending debt repayments and a GDP shrinking by 7%. Top to bottom economic catastrophe.”

Tim Ash of Standard Bank said in a note:

Seems like IMF board approved latest USD1.4bn tranche disbursal, as Fund officials talk about prior actions being delivered. But “recalibration” suggests that macro framework is likely in need of revision – deeper recession, slower recovery, wider budget financing gap – and likely a bigger financing programme, with more money up front – note the donor’s conferences slated for later next month. The impact of an extended conflict in the east is likely to mean a bigger drag on economic activity, and a larger weight of public sector debt and indebtedness. The question of burden sharing might come to the fore and what exactly should be Ukraine’s spending priorities at this time: I.e. re-arming, paying pensions, public sector salaries, gas debts to Russia, or debt service. Ukraine cannot meet all these calls on public finances given the state of war…something will have to give.