The International Centre for Policy Studies has prepared another analytical publication “Economic Analysis and Trends” for August 2018. It contains a detailed analysis of indicators of the manufacturing sector, prices, financial markets and the forecast for 2018-2020 on the development of the Ukrainian economy.
According to the analytical paper, the second quarter of 2018 was characterized by the following trends:
- Growth of GDP accelerated to 3.6%.
- There were higher rates of growth in agriculture (due to early harvesting), energy sector and passenger transport.
- In July, after two months of zero inflation, deflation occurred. Annual inflation further slowed down to 8.9%.
- In July, the rapid growth of the hryvnia balance of loans of the population restored. Residues on household hryvnia deposits decreased.
The forecast part states that the second half of 2018 will be characterized by the following trends:
- Decrease in private consumption growth.
- A moderate devaluation of the hryvnia will occur.
- The price of gas for the population will rise significantly.
- Growth in industries, in particular retail and passenger transportation, will be lower.
- Acceleration in agriculture should occur due to the high expected yield of late crops.
- The dynamics in the food industry will be improved.
- The level of inflation will not be much higher than the upper limit of the target corridor (8%), despite the devaluation and the expected increase in gas prices for the population.
The document is available in Ukrainian as well as in English.
Please contact us for more information, ordering, previewing the release, and getting acquainted with the terms of subscription:
tel. (044) 253-22-29, (068) 831-94-69
Rating of financial health of Ukrainian banks
International Centre for Policy Studies (ICPS) and online media “Apostrophe” presented the rating of financial health of Ukrainian banks, which is planned to be updated on a quarterly basis. The presentation took place on March, 12 in Kyiv. The uniqueness of the rating is that banks were evaluated in terms of attractiveness for both their own shareholders and their clients. It characterizes the bank's business model as a whole and is calculated as the sum of sub-indices of reliability and efficiency. “The first sub-index summarizes a group of criteria that assess the degree to which the bank complies with key economic standards, thus reflecting its ability to withstand internal and external risks for its operations. The second sub-index reflects the criteria for assessing the bank's ability to generate profits and the efficiency of its assets,” senior ICPS expert Yehor Kyian said. The rating was elaborated separately among large banks (with assets over 50 billion USD) and all banks with assets of over 2 billion USD. “At the moment, the most financially healthy among large banks is PrivatBank, Alfa-Bank and Raiffeisen Bank Aval. These banks are trying to adhere to all standards and fulfill all their obligations,” Yehor Kyian said. Under the sub-index of reliability among large banks, the first three banks included such as PrivatBank, Ukreximbank and Raiffeisen Bank Aval. In turn, Alfa-Bank, Raiffeisen Bank Aval and PrivatBank are the leaders in the sub-index of efficiency. Top 10 banks with assets in excess of 2 billion UAH include Idea Bank, Universal Bank, A-Bank, Citibank, PrivatBank, Alfa-Bank, Raiffeisen Bank Aval, MIB, Credit Agricole Bank, OTP Bank. The results of the rating showed that small banks compete successfully in compliance with the standards, and large banks often show significant efficiency in using their assets. There is also a significant gap between the most and the least financially healthy banks (almost in six times), indicating a significant margin for improvement. Executive Director of the Independent Association of Ukrainian Banks Olena Korobkova is convinced that the situation in the banking sector after the “banks fall” in 2014-2015 years is gradually being adjusted. “As of January 2019, we have 67 profitable banks. Over the past year, we have only one bank left, it's “VTB Bank”. The redistribution of customers has already taken place, so the banking system has already been updated and I hope that it will gain momentum in the growth of the Ukrainian economy,” she said. At the same time, Olena Korobkova noted: “Any rating is an additional sign for making a decision in which bank to serve. According to world experience, many factors are needed to be considered and ranking is one such”. The chairman of the International Centre for Policy Studies Supervisory Board Viktor Mashtabey advised researchers who promise to update the rating quarterly, to try to expand it comparing to the situation in other countries. The rating of financial health of Ukrainian banks and more detailed information on research and methodology can be found via the link (Ukrainian version): LINK
Peculiarities of IMF Memorandum Implementation in 2019
Ukraine received the first part of the IMF tranche in the amount of 1.4 bln. dollars on December 25, 2018. Accordingly, there will be a need to struggle for additional 2.5 bln. dollars. Of course, the Stand by requirements of co-operation are softer than under EFF, and the risks of non-obtaining the next part are lower, however the necessity of receiving the money "pressures" the government so that the interested stakeholders can take advantage of it and push their whims, especially before the elections, under cover of the necessity to meet the requirements of the memorandum. Therefore, it is necessary to analyze the possible areas for manipulation. The International Monetary Fund approved a program of assistance for Ukraine in the amount of 3.9 bln. dollars under the Stand by program on December 18, 2018. There are less requirements under this program. However, the interesting fact is that the review of the program and, accordingly, the progress of the implementation of the memorandum will only be in June-July, just after the presidential elections. On this basis, two risks can be noticed at once - attempts to reach the elections at any price and the uncertainty about the policy of the future president. With regard to monetary policy, taking into account the effectiveness of the NBU, no one should worry about it. According to forecasts, inflation in 2019 should be at the level of 7% - in case, of course, the coordination between the authorities will not fail. In turn, the introduction of medium-term budget planning will be introduced at least declaratively and will enable the effective implementation of budget projects for more than 1 year. In turn, political bargaining can lead to the situation when the requirements, that have a significant impact on the Ukrainian economy, will appear the most difficult to implement, in particular, the adoption of laws on SPLIT, privatization, energetics, administration of revenues and monetization of subsidies. What does the IMF require? · Administration of revenues The memorandum requires the reorganization of the State Fiscal Service (SFS) into two legal entities: the State Tax Service (which will include the department of the tax police) and the State Customs Service. They will be under accountability of the Ministry of Finance. This structural benchmarks must be completed by the end of April 2019. It is also planned to replace the Tax Police with a new institutional body. The first problem is that the unification of central and regional SFS offices takes place during the budget decentralization process. The latter gives local authorities the opportunity to set the rates and to administrate the taxes. At the same time, the reorganization of the SFS does not provide for the possibility of administrating the local taxes and fees directly to local authorities. Another problem is that the reorganization of the SFS does not solve the systemic problems. In particular, Ukrainian customs is currently under the jurisdiction of the SFS. The losses from smuggling and from the "inefficiency" of its functioning are over 4-5 billion dollars annually. The same figures were mentioned by the Minister of Internal Affairs of Ukraine Arsen Avakov, during the meeting with the representatives of business regarding the fight of law enforcement agencies against smuggling at the customs. Such sums are impressive due to these funds could be used to address the key economic and social issues of the Ukrainian economy. · Energetics Despite the positive developments and understanding of the need to preserve the Ukrainian gas transportation system, which resulted in a twofold decrease of gas transit tariffs, the government, while preserving the monopoly in the energy market, pushed the requirement for further tariff increase for gas and heating. In addition, an increase in gas extraction is required. The situation will be more complicated with regard to carrying out the unbundling of NJSC "Naftogaz of Ukraine". According to the agreements, it should transfer non-core transit activities to PJSC "Main Gas Pipelines of Ukraine" in 2019. In addition, the certification of the operator of the gas transportation system should take place. Firstly, the government and the management of "Naftogaz" have different views on the unbundling process (Full Ownership Unbundling or Independent System Operator), which may delay its practical implementation. Secondly, after tripartite consultations with the EU and "Gazprom", NJSC "Naftogaz of Ukraine" declared the impossibility of carrying out the unbundling due to gas contract with the Russian Federation. Under current contract, the functions can be divided only after the consent of the RF. There is also resistance from the side of "Naftogaz" - after the distribution of functions, it will only have the role of a trader. Thus, unbundling is unlikely to happen until the end of 2019. · Monetization of subsidies The pilot project should start in March 2019. Currently, there are 4 million recipients of subsidies in Ukraine and its average size is 1500 UAH. Thus, the government will give nearly 6 billion UAH per month in cash. At the same time, although the monetization of subsidies is to some extent a promising solution, however under the monopolization of the utility market, the recipient of subsidies will still not be able to select to whom, how and how much to pay - the money will be received by the same companies. In addition, it should be taken into consideration that presidential elections will take place in April and the monetization of subsidies during this period can easily "bribe" the voter. · Financial policy The memorandum includes the requirement of further increase in the stability of the banking system, the growth of the capitalization of banks (by the end of March 2019), a decrease in the amount of non-working loans, the entry of EBRD and IFC into the capital Oschadbank and Ukrgasbank. An important requirement is the adoption of the Law on amendments to certain legislative acts of Ukraine regarding the consolidation of the functions of state regulation of financial services markets or, in other words, the Law on "Split" (by the end of March 2019, a structural benchmark). As a result, all functions of the National Financial Services Commission are transferred to the NBU, except that are not related to pension funds, construction financing funds and real estate financing funds - the latter will be transferred to the National Securities and Stock Market Commission. In turn, the National Financial Services Commission will be liquidated. While analyzing the market of non-bank financial institutions, statistics show that there were 2021 of them as of December 2018. Such a number of institutions indicates the demand and importance of non-bank financial institutions for the functioning of the market. Non-bank financial institutions in Ukraine Type of institution Amount, as of December 2018 Assets, thousand UAH Administrator of non-state pension funds 22 With NBU – 1 027 260 286 Without NBU – 259 286 Trust company 2 - Credit union 358 2 169 796 Pawnshop 366 3 763 667 Non-state pension fund 62 2 465 560 Insurance company 281 53 679 752 Financial company 930 66 780 189 Source: according to the National Financial Services Commission The relevant existing parameters and norms for their functioning will be later changed by the regulator, probably after the adoption of the Law on SPLIT. Thus, there may be a conflict of interests due to higher requirements and "own" standards. Such implementation of the new standards may suspend the development of non-bank financial institutions and may cause the companies exit from the market. On the other hand, this situation can stimulate the development of banking institutions, while opening the new niches for them. · Privatization According to the agreements, nearly 500 objects of small-scale privatization should be sold through the system of electronic auctions ProZorro by the end of April 2019. Regarding large privatization, 16 objects will be offered for sale: - Energy industry: PJSC "Tsentrenergo" (should be sold in the first half of 2019); OJSC "Ternopiloblenergo"; PJSC "Zaporizhiaoblenergo"; JSC "Kharkivoblenergo"; JSC "Mykolaivoblenergo"; JSC "Khmelnytskoblenergo". - Mining industry: JSC "United Mining and Chemical Company"; State Enterprise "Coal Company "Krasnolymanska" (should be sold in the first half of 2019). - Machine and instrument making: PJSC "Azovmash"; SE "Plant "Electrotyazhmash". - Chemical industry: PJSC "Sumykhimprom"; PJSC "Odessa Port Plant". - Processing industry: JSC "Oriana". - Health, culture and sports: PJSC "President-Hotel" (should be sold in the first half of 2019); PJSC "Indar" (should be sold in the first half of 2019). - Agriculture: PJSC "National Joint-Stock Company "Ukragroleasing". It is important to mention that Ukraine pledged to submit a draft law on reducing the list of companies prohibited for privatization (by the end of April 2019). Taking into account the statements of the Head of the State Property Fund regarding the IMF support in privatization (however, it cannot be said that the IMF itself will be involved in the re-activation of large privatization), there is a risk that this process may turn into a "strategic flea market" for stakeholders, seemingly under the cover of direct IMF requirements. There may also be some issues with regard to state property leasing laws and concessions that are to be adopted in the first half of 2019. In particular, behind the good intentions of finding additional funding, there may hide the "monopolization" of key state property in order to enrich people close to local authorities. There may be a situation when the property, that is built on budget funds and cheaply placed for concession, will be exploited just before the next need for restoration or repair. In this period, it may simply be returned to the state. In addition, the state's interest in maintaining its own facilities in good condition under the "concessionary agiotage" is lower, taking into account the lack of funds for regional programs and needs. What will not happen? The IMF memorandum mentions reforms that will not be carried out in 2019. In particular, there will not be tax amnesty, tax benefits or privileges will not be introduced. There is also no provision for the introduction of a tax on withdrawn capital and a second level of the pension system. However, there also will not be a significant economic development of Ukraine in 2019. In particular, the World Bank has worsened the forecast of GDP growth for Ukraine to 2.9% in 2019. The forecast was also revised downwards by the Ministry of Finance - according to it, growth will be only 3%. For the effective cooperation, the Ukrainian economy should grow at least 5% of GDP per year. And for this purpose it is necessary to solve a number of systemic problems: - Growth indicators. The peak of GDP growth in Ukraine is already passing. The effect of the zero base played in favor of the government before, however currently achieving growth is becoming impossible without real changes and reforms. Forced tightening of screws, strict monetary policy with corresponding interest rates restrain the country's economic development, resulting not in an inflow, but in an outflow of capital. - Trade indicators. Trade imbalances, the prevalence of raw materials in Ukrainian exports, import and energy dependence only worsen the trade balance indicators with each year and reduce the foreign currency earnings. - Indicators of transparency and corruption. Launching the work of the Anti-corruption court, increasing the efficiency and transparency of the authorities will promote the fair distribution of funds and improve the investment climate. - Indicators of reforms (market). The reforms in the country should be carried out independently, without the need for external supervision and control. Unfortunately, the IMF is the only lever of influence on reforms in the country. At the same time, the IMF acts as a kind of "reanimation brigade". The problem is that reanimation of the country for 25 years (the Ukraine-IMF relationships continue for such a period) already seems to be wrong. Currently Ukraine has almost reached the amount of 30 billion dollars of loans from the IMF throughout the history of relations and for another 15 years Ukraine will have to pay all its debts. As long as there is a propagation of the ideas of interested stakeholders, without taking into account the national ones, under the cover of the IMF requirements with its corresponding "demonization", instead of real and full reforms, economic development should not be expected; and it is unlikely that Ukraine can become a success-case in IMF portfolio.
Economic Outcomes and Prospects of Ukraine: Progress, Regress or Status Quo?
On the one hand, the year 2018 is characterized by relative stability of the economic situation in the country, and, on another hand, is showing the lack of achievements. At the same time, foreign economic situation in 2019 may worsen, while leading to greater stagnation or even economic crisis. In turn, Ukraine is still completely unprepared for the year 2019 because of the government's failure or reluctance to show political will to implement the reforms. Accordingly, Ukraine should learn how to minimize the economic risks of probable occurrences, not just their consequences post factum. What was remarkable in 2018? Compared to previous years, the economy of Ukraine developed in the absence of significant shocks in 2018. The main changes that have had a greater or lesser impact on economic development were the following: • Macroeconomics and finance. The fact that for the first time since the crisis the banking sector has become and remains profitable can be stated among the achievements in this area. Also, tax revenues have raised. On the other hand, this growth was more due to inflationary processes in the country and due to the increase of wages. This has affected the expansion of the tax base and, accordingly, the tax revenues. At the end of 2018, a balanced budget was adopted. On the other hand, the slow pace of economic growth and insufficient growth of domestic production were felt, inflationary pressures increased remarkably. Accordingly, the discount rate was raised, which currently amounts up to 18% per annum, thus restraining the economic development. Further stability of the economy is unlikely to be able to "be guided" only by the discount rate and currency intervention. A three-year budget planning for minimizing the shocks has not been launched. In addition, the following was observed in the economy: - insufficient amount of investments, problems with timely allocation of money of financial organizations and other funds for infrastructure projects; - the share of non-performing loans in the Ukrainian economy reached 54.31% (as of October 2018); - there were problems with reimbursement of benefits and subsidies for the enterprises of housing and communal services, etc. • International economic relations. It looked like that only the NBU fought with the results of non-market price increases, turbulence in foreign markets and the decrease of investors' interests in Ukraine in 2018. Meanwhile, there was a relative stability of hryvnia, the dynamics of replenishment of gold and foreign exchange reserves was positive during the year. At the same time, asymmetries in foreign trade and insufficient lobbying of national interests was present. In particular, this led to the fact that Ukraine used quotas for the main commodity groups in trade with the EU during the first months of 2018. According to the latest State Statistics Service data, the negative foreign trade balance of Ukraine is $ 3.45 billion after 3 quarters of 2018 passed. For comparison, during the same period of 2017, the negative foreign trade balance was equal to $ 1.11 billion. In addition, the following facts should also be noted: - emigration remains one of the main problems of Ukraine in recent times; - the entering to the foreign borrowing market in 2018 was not urgent; the strategy on external and internal debt remains declarative; - Ukraine could not agree with the IMF on the tranche during the year. There is still a small chance to get a tranche for the New Year's holidays. • "Non-market Shocks". Among the "non-market shocks" in 2018, the following is particularly highlighted: - Situation in the waters of the Azov Sea and the problems with the passage of ships to Ukrainian ports. Despite the fact that the total turnover of Azov ports is barely up to 4 million tons, the delays in the delivery of cargoes in this region have created threats to the functioning of local infrastructure and worsened the transit status of Ukraine. - The introduction of the martial law has become a precedent for Ukraine and economy. Although it will not significantly affect the state of the economy in 2018, however, it has given negative signals to investors regarding the development of the situation in the country. • Energetics. Form the positive side, it is worth mentioning the encouragement of the increase of the green energy share. On the other hand, currently, the share of renewable energy in Ukraine is only 1.8% (in price - 8.3%). In addition, the Stockholm Arbitration Court ordered Gazprom to pay the Ukrainian company $ 4.63 billion for short supply of gas under transit contract (or $ 2.56 billion, taking into account the Ukrainian side's debt for the supplied gas). There were no other achievements in the energy sector. All the same problems remain with the "creation" of formula tariffs, subsidies and payments between the major suppliers in Ukraine (due to which problems in receiving hot water and heating occurred in a number of cities), the general constant increase of tariffs for households and industrial producers, overloading of power stations, etc. In addition, the unreasonable government policy, insufficient gas volumes in the storage facilities during early March led to its deficit in the country (which was the reason for the declaration of an emergency situation), and which was solved by additional, more expensive imported gas. • Privatization. There was a failure of privatization again because of poor management of state property and the inability to trade: the sale of state property brought less revenues to the state budget than was planned. The reason was the disruptions / failures of large privatization objects sale due to their unsatisfactory conditions, including finance, and peculiarities of participation in tenders, the politicization of some decisions. The inability to sell the companies resulted in the decrease of their attractiveness, while reducing their estimated value and possible revenues to the budget. As a result, large privatization has been postponed for 2019. • Improved transparency. Under this aspect, in particular, the transparency of the banking system has partially increased due to the new requirements for the organization of risk management system, due to the disclosure of data on components and capital adequacy of banks, and due to the creation of a credit register. As for other spheres of economy, an online resource for price tracking was launched, new sections were introduced on e-data regarding the openness of local budgets data, there was some degree of de-shadowing and improvement of tax servicing, small privatization on ProZorro.Sales and pilot projects on the introduction of electronic receipt (e-Receipt) were launched. Nevertheless, the openness of data is unlikely to effectively impact the minimization of corruption in the country at this stage. What does await Ukraine in 2019? The following year, Ukraine will need to concentrate on the following areas: • Macroeconomic indicators. Among the main ones it is necessary to highlight: - Growth of GDP in 2019 will slow down to 2.3% due to lower growth rates of the global economy and due to allocation of significant amount of money on debt financing. - In the beginning of the year, the inflation will significantly accelerate due to rising gas prices for the population and corresponding revision of tariffs for heating and hot water. In general, inflation will decrease to 6.8%, primarily as a result of tight monetary policy in 2019. - The election campaign can lead to an increase in social standards while lacking the sufficient economic growth. KEY INDICATORS Final data Estimate Forecast Year 2014 2015 2016 2017 2018 2019 2020 NATIONAL ACCOUNTS GDP, billions UAH 1 567 1 979 2 385 2 983 3 483 3 918 4 348 Real GDP, apc** -6,6 -9,8 2,4 2,5 3,0 2,3 2,6 Real total consumption, apc -6,2 -15,2 2,0 7,1 3,5 2,1 2,1 Real gross fixed investment, apc -24,0 -9,2 20,4 18,2 14,0 8,0 8,0 MANUFACTURING AND AGRICULTURE Real industrial output, apc -10,1 -13,0 2,8 0,4 1,7 2,2 2,4 Real agricultural output, apc 2,2 -4,8 6,3 -2,7 8,0 0,0 3,0 HOUSEHOLDS Population at the start of the year, millions 45,5 45,3 45,2 45,1 44,9 44,8 44,7 Real disposable household income, apc -11,5 -20,4 2,0 7,4 8,0 2,0 2,0 Average monthly real wages, apc -6,5 -20,2 9,0 19,1 13,0 5,0 5,0 Average monthly nominal wages, UAH 3 480 4 195 5 183 7 104 8 912 10 371 11 898 Unemployment rate, ILO methodology, % 9,3 9,1 9,3 9,5 9,0 8,5 8,0 Real retail trade, apc -9,6 -19,8 4,5 6,0 4,0 3,5 3,0 PRICES Consumer price index, apc 24,9 43,3 12,4 13,7 10,0 6,8 6,0 Producer price index, apc 31,7 25,5 35,7 16,5 16,0 10,0 9,0 Construction price index, apc 15,7 22,7 9,9 15,5 22,0 8,0 8,0 FOREIGN ECONOMIC ACTIVITY Exports of goods and services, apc -19,9 -26,9 -3,9 17,1 10,0 4,5 4,3 Imports of goods and services, apc -28,1 -29,3 4,5 19,2 14,5 2,8 3,4 Current account balance, % GDP -3,5 1,8 -1,4 -2,2 -4,3 -3,8 -3,5 Net FDI, millions USD 299 3 012 3 268 2 593 2 300 2 500 2 500 FINANCIAL INDICATORS Monetary base, apc 8,5 0,8 13,6 4,6 6,0 5,0 4,0 М3, apc 4,9 3,9 10,8 9,5 8,0 7,0 6,0 NBU gold/forex reserves, millions USD 7 533 13 300 15 539 18 808 19 000 18 000 17 000 Official exchange rate, average annual, UAH/USD 11,89 21,84 25,55 26,60 27,30 29,50 31,00 UAH loan interest, last month of the year, % 16,6 20,4 15,2 17,5 22,0 20,0 18,0 Source: "Economic Analysis and Current Trends: Forecast for 2018-2020", ICPS, 2018 • Energy aspect. In general, the issue of the strategy for achieving the energy security remains one of the most important challenges for Ukraine's national interests. The Ukrainian government has announced the plans to achieve the country's energy independence and sustainable development, however the path remains blurred. Realization of Russian projects of alternative gas pipelines may leave Ukraine on the sideways of such an important element of economic activity as transit of gas, while leading to significant financial losses. In particular, a contract between Gazprom and Naftogaz for the transit of gas ends on December 31, 2019. At the same time, Gazprom filed a lawsuit regarding the termination of the transit contract through Ukraine. The arbitration institute of the Chamber of Commerce of Stockholm united the above-mentioned lawsuit with the Naftogaz's claim to revise the tariff by $ 12 billion in one case. • International finance. Due to trade wars and capital outflows from developing countries, Ukraine may have lower foreign currency earnings. In addition, the loan market will become more expensive. Partially, the new tranche of the IMF may help Ukraine, however, given that the next year Ukraine needs to pay $ 5.88 billion of external debt and $ 14.8 billion of internal debt, while the gold and foreign exchange reserves are projected to be at the same level, its volumes will be not enough to solve all the problems of Ukrainian economy. The government will need to search for the ways to get out of the situation. In the absence of the state's strategy of managing the external and internal debt, the country will face additional challenges for development. In addition, there was no final decision of the London High Court on "Yanukovych's debt", amounting up to $ 3 billion. Theoretically it can be adopted in 2019. Main scenarios and recommendations Thus, the Ukrainian economy did not achieve significant results in 2018 and remains vulnerable to external shocks of the following years. There is an urgent need to minimize the listed risks to economic development of the country. On the background of less optimistic governmental predictions regarding the year 2019, the problem of a vicious circle "maintaining stability - the lack of economic prospects" becomes apparent, and the issues how to escape out of it and what to do next rise. In this regard, the introduction of effective medium-term planning could theoretically add "predictability" to the development of the Ukrainian economy. On the other hand, applying of such an approach practically in the realities of Ukraine is quite complicated while its vulnerability to internal and external shocks. Accordingly, any plans can be easily "spoiled" under turbulence conditions. In addition, the biggest part of the indicators of Ukrainian plans are set manually, while depending on the "mood" of the government, and are usually static rather than dynamic. They do not change automatically, while based on the formula calculations depending on the situation, and they do not guarantee the promptness of updating the plans or their relevance and independence from the government decisions. The final result is blurred. Thus, it is important how the "reboot" of the government after the elections in the next year will take place. Taking into account the above stated, it is necessary to maintain stability in the mid-election period. In general, the positive scenario of the Ukrainian economy's development in 2019 is unlikely to happen and is not feasible for consideration. Therefore, there is a need to distinguish the following scenarios: • The basic scenario seems to be more credible. According to it, the transitional government will not risk making significant changes and implementing reforms. The Ukrainian economy will continue its stagnant development trend. On the other hand, this will not cause any resistance from the interested stakeholders and the government will be able to fulfill its functions. • In the case of a negative scenario, the post-election period will be characterized by blocked decisions of the transitional government, uncertainty and lack of time for maneuver. Ukraine risks not getting a tranche of the IMF and will not be able to pay off its debts. This will result in the country's technical default. Accordingly, while "rebooting" period, making changes will be inappropriate and difficult. However, after the formation of the government, it will be important to rethink economic development, because otherwise Ukraine will change the stagnant trend. Nevertheless, Ukraine gains experience with every year and 2019 may be extremely fruitful.
Macroeconomic Indicators for Autumn 2018 - ICPS Forecast
The International Center for Policy Studies (ICPS) has prepared another analytical publication “Economic analysis and current trends” for September 2018. It contains a detailed analysis of indicators of the manufacturing sector, prices, financial markets and the forecast for 2018-2020 for the development of the Ukrainian economy. According to the analytical document, the beginning of the autumn 2018 was characterized by the following facts: - the harvest of early cereals decreased significantly compared to the previous year due to the lower level of yield; - the yield of late crops has grown substantially, so that the yield of corn and sunflower should be much higher than in the previous year; - at the beginning of autumn, industrial production declined by 0.5% y/y; - estimate of GDP growth in the second quarter of 2018 increased to 3.8% y/y; In turn, in the forecast part it is stated that: the forecast for economic growth in 2018 remains at 3%; in case of non-receipt of IMF financing, growth rates may be lower; in the baseline scenario, GDP will increase by 2.5% in 2019; The material is available in Ukrainian as well as in English. Contact ICPS for more information, ordering, previewing the release, and getting acquainted with the terms of subscription: e-mail: email@example.com тел. (044) 253-22-29, (068) 831-94-69
Ukrainian migration: what our neighbors should expect?
Emigration has become one of the main tendencies and problems of Ukraine in recent times. This phenomenon has become a consequence of domestic difficulties in the country and a lack of faith in the improvement of economic prospects. In addition, Ukrainian migrants are also affecting the neighboring countries, which may lead to asymmetries in their labor markets and to other negative consequences. Therefore, it is necessary to assess the scale of migration of the Ukrainian workforce and the prospects for such a process, both for Ukraine and for the "hosting" countries. Situation analysis According to the latest information from the Ukrainian State Statistics Service, the number of migrant workers reached 1.303 million in 2015-2017. The share of labor migrants in the total population amount is 4.5%. Compared to the years 2010-2012, this indicator has increased by almost 10%. The main countries that "import" our labor force are Poland (38.9%), the Russian Federation (26.3%), Italy (11.3%), the Czech Republic (9.4%). In general, personnel with vocational education (33.9%) and complete secondary education (30.1%) are leaving Ukraine. Only 16.4% of migrants have complete higher education. 26.8% of the total amount of migrants worked according to the qualification; 29.5% worked in other field than the obtained qualification; 36.1% worked at a job that did not require qualification. It is seen that the percentage of low-skilled labor is rather high: the countries "filled" the niche of low-skilled labor with Ukrainian personnel: 41.6% of migrants are employed in the simplest professions. The percentage of employment in other professions is rather low (exception: skilled workers with tools - 25,9%). It should be noted that the Ukrainian State Statistics Service provides data based on a sample survey of the population (households) on labor migration and figures may differ from the actual ones. What are we facing? The increase of labor migration will have the following consequences: For Ukraine For hosting countries Negative consequences: Negative consequences: • labor market asymmetries, a change in the balance of highly skilled and low skilled personnel • "rising price" for the domestic labor market • importing the labor resources from abroad • additional expenses of the country for the education of new specialists • "aging" of the nation • lower production rates in the country • increased competition with the local population • higher probability of rising unemployment • conflicts, cross-cultural misunderstandings may appear • increased risks of illegal migration • local labor force begins to seek for job opportunities in other countries, asymmetries of the market arise Positive consequences: Positive consequences: • increase of money transfers from labor migrants • reduction of unemployment in the domestic market • part of the workforce returns with new knowledge and experience • the inflow of migrants fills unclaimed jobs • migrants do not need to be educated • "imported" labor force accelerates economic development • foreign workers reduce the average market wages • migrants stimulate consumer demand Under conditions of insufficient growth of production and the existence of unemployment, emigration does not create significant threats. Accordingly, the current shortage of personnel in Ukraine due to emigration is still subcritical: • Labor market is “overcrowded” due to insufficient growth of the Ukrainian economy (correspondingly, due to small supply of jobs). • A significant number of migrants are residents of the eastern regions, in particular from the territories of the ATO, to whom the Ukrainian market and state can not provide the necessary employment. • The share of emigrants who have left Ukraine permanently is covered by immigrants. In particular, according to the State Migration Service of Ukraine, 264,732 immigrants are registered by the end of 2017. • Despite the fact that the scale of migration is quite large (even according to the official data), it should be noted that it has a seasonal nature. The share of labor emigrants in the total population is less than 5%. According to the Ukrainian State Statistics Service, the share of migrant workers returning to Ukraine is 43.2%, the share of short-term migrant workers is 48.5% and emigrant workers is 8.3%. At the same time, although money transfers of migrants only partially cover the losses of our economy due to the outflow of labor force, in the current situation, the transfers of migrants even exceed foreign direct investments in dollar equivalent. According to the NBU, the volume of money transfers to Ukraine decreased by 4.4% in 2017, however it still amounted up to almost $2.378 billion. On the other hand, though basically low-skilled labor force leaves Ukraine seasonally, there is also a sufficient share of highly skilled emigrants. This situation worsens the asymmetry of the Ukrainian labor market and is really critical. Accordingly, the current threat to the Ukrainian economy is the outflow of highly skilled employees. In addition, continuation of the process of other kind of personnel leaving will also affect the country's economic security in long term. Even today, there is a shortage of employees in the sectors of Ukraine that are dynamically developing (where the largest number of vacancies is open and where it cannot be filled by appropriate personnel for a long time). Nowadays, Ukraine needs technicians, directors, managers, skilled workers with tool, personnel for equipment and machinery maintenance, operation and control. The largest number of opened vacancies is in the spheres of sales and trade, service, labor specialties and manufacturing. In turn, the outflow of younger generation, the aging of the nation, and the decrease in the number of economically active population (by almost 6%) are weakening the preconditions (resources) for the future rapid economic growth. At the same time, the Ukrainian economy needs to grow more dynamically, taking into account the chosen course of rapprochement with the EU countries. However, the economic gap is only increasing annually. Thus, it is difficult to break the vicious circle of "migration and the lack of economic prospects" and it will be even more difficult to do it in the future. Is there a way out? According to the Ukrainian State Statistics Service, about 40% of employees receive a minimum wage or near to it today (the minimum wage is formally received by 10% of full-time employees). In confirmation, about 46.2% of the total number of households in the country received subsidies for reimbursement of expenses for housing and communal services in 2017 - this is 10.3% more than in 2016. Accordingly, this is a characteristics of the employment situation in Ukraine. This is facilitated both by the personal qualities of individuals, that influence professional achievements, and the established "traditions" among the employers: non-fulfillment / absence of the norms of social corporate responsibility, the desire to save, underpay, earn quickly and the small share of the employee salary in the price of goods / services. Thus, besides basic, it becomes impossible to meet the other needs. Taking the above stated into account, higher wages, especially in the neighboring countries, stimulate the migration of Ukrainian labor resources. Moreover, foreign companies and countries are interested in attracting the external, especially highly skilled, personnel, because they do not spend money on their education. Meanwhile, there will be no major changes in the labor market and migration processes: all the tendencies will remain the same. The rates of personnel outflow from Ukraine will depend on economic (mainly on wages and purchasing power of hryvnia) and non-economic factors (social, cultural, security factors, etc.). The financial conditions of citizens, their needs, the policy of neighboring countries regarding the employment, etc. will be determinative. In other words, in Ukrainian realities, only economic stimulus is capable of keeping personnel on its territory. According to the NBU's commentary, labor migration will grow several years before wages rise to the required level. At the same time, it should be noted that the growth of nominal wages in Ukraine is significantly overtaking the real: its required level will be difficult to achieve in the near future. Given the growing number of Ukrainian migrants and the possibility of increasing the negative consequences not only for Ukraine but also for hosting countries, we should pay attention to the following: • The idea of signing bilateral agreements on labor and migrants has a great potential, taking into account the diversification of opportunities and experience. In addition, it is likely to reduce the number of "uncontrolled" migration and, thus, countries will be "ready" for changes in the labor market and labor flows. • Under today's conditions, taking into account the main directions of Ukrainian budget expenditures, the labor market and its support remain without attention. Therefore, a clear strategy of the state is necessary, including the stimulation and support of economically active population, the creation of targeted programs for country development, business development, provision of specialists and education of the necessary personnel. • Focusing on products with greater added value, further ensuring economic growth and stimulating wage growth in line with economic growth, increasing the share of labor in product prices, further implementation of corporate social responsibility practices, providing white wages, social welfare packages, re-training, etc. In long term, stabilization of the situation and crisis-free development will allow young professionals and labor resources to feel confident in their country and its support that will slow down the outflow of personnel from Ukraine and prevent negative consequences for the neighboring countries. Unfortunately, at the moment there is no effective strategy and cooperation on labor migration. Instead, only the talks are being heard from the Ukrainian side and active preparations for the elections are taking place.
Privatization 2018: vital need or usual habit?
At the end of May - early June, the Ukrainian government announced the final list of small and large privatization objects. According to the acting head of the State Property Fund Vitaliy Trubarov, such list of enterprises for sale is the largest for the last 10 years. Is the abovementioned thesis really an "achievement of the government", what prospects and risks of such "comprehensive" privatization? What do we have In recent years, the announced privatization of 2018 has the most ambitious plans. Budget revenues from privatization in the current year are projected at the level of 22.5 billion UAH. The key features of the privatization in 2018 are the following: ● In January 2018, the list of enterprises for privatization did not exceed 335 objects. Later on, the list of privatization was broadened, firstly reaching 576 objects, and then - more than 700 objects. ● Small privatization. The list includes 716 objects and is divided into: 1) enterprises based on the combination of property of various forms of ownership; 2) single property complexes of state enterprises and their structural subdivisions; 3) separate property; 4) objects of unfinished construction; 5) objects of social and cultural purpose. The privatization process will take place exclusively through electronic auctions. ● Large privatization. The list for privatization was reduced from 26 to 23 enterprises. The Aluminum Foil Factory, the Agrarian Fund and the State Food and Grain Corporation of Ukraine were removed from it. Auction on sale of large privatization objects will have the following features: 1) in the absence of the second participant, the auction will not be held, and will automatically be considered to be not occurred; 2) the participants are obliged to make at least one step of bidding to exclude collusion attempt; 3) the information about the auction participants and their amount are not the subjects to be disclosed before the auction starts; 4) in the case that there is only one participant, a ransom is made at a price not lower than the starting one; 5) if during the auction with raising price sale, so-called British auctions, the object is not sold, a decision is taken to reduce the starting price by 25%; if this attempt is useless, then the price is reduced by 50%. If the object of privatization is not sold in the above-mentioned ways, a decision is made to sell it at auction by the method of studying price offers. ● The list of those who cannot be a buyer have been broadened by the representatives from the Russian Federation and by the persons under sanctions. ● The list of objects that are not a subject to privatization was also broadened: medical institutions and educational institutions have been added to it. ● The Cabinet of Ministers of Ukraine has refused to privatize or lease ports, they will be transferred exclusively under concession. Situation analysis At present, there are 3444 objects in state ownership. Table. Distribution of state-owned objects Type Number of state-owned objects, units Assets, billion UAH Percentage ratio, % Strategic objects 15 1175 69 Important objects 363 147 8,6 Objects with control lost 559 45,1 2,6 Inactive objects 1255 132,6 7,8 Concession (airports, forestry, highways) 359 14,5 0,9 Others 893 189,4 11,1 Total 3444 1704 100 Source: According to the Ministry of Economic Development and Trade of Ukraine The Ukrainian government plans to gradually reduce the number of state-owned objects and intends to leave only 15 particularly important state-owned enterprises and 363 objects that ensure the state's fulfillment of its functions. The list of 15 particularly important enterprises that should remain state-owned include: Ukrzaliznytsia, Ukrposhta, Naftogaz Ukraine; strategic enterprises of the aerospace industry - CB Yuzhnoye, Plant 410, Yuzhmash, Antonov, Khartron, Kharkiv Aviation Plant; Administration of seaports; energy companies - Energoatom, Ukrenergo, Ukrhydroenergo, Eastern Mining and Processing Plant; Ukrchimtransamiak. In addition to privatization, 359 objects are also planned to be transferred under concession. Despite the proclaimed goals of protecting strategically important enterprises, the analysis of previous documents, in particular the Resolution of the Cabinet of Ministers of Ukraine # 83 on March 4, 2015 "On Approval of the List of State Property Objects Strategically Important to the Economy and Security of the State", showed that a large the number of objects in this year "stopped to be" strategically important: 14 out of 23 companies included in the list are strategically important for the Ukrainian economy, in particular chemical industry enterprises. Table. Large privatization objects to be privatized in 2018 Code according to USREOU Name of the object The proportion of shares, % Strategic value (2015) Energy industry 22927045 PJSC "Tsentrenergo" 78,289 + 00130725 OJSC "Ternopiloblenergo" 50,999 + 00130926 PJSC "Zaporizzhyaoblenergo" 60,2475 + 00131954 JSC "Kharkivoblenergo" 65,001 + 23399393 JSC "Nikolaevoblenergo" 70 + 22767506 PJSC "Khmelnytskoblenergo" 70,0089 + 00131771 JSC "Kherson Teploelektrocentral" 99,8328 00130820 JSC "Dniprovskaya Teploelektrocentral" 99,9277 00130850 PJSC "Kryvy Rih Teplocentral" 99,9864 00131050 State Enterprise "Severodonetsk Teploelektrocentral" - Mining industry 36716128 PJSC "United Mining and Chemical Company" 100 + 31599557 State Enterprise "Coal Company "Krasnolimanskaya" - Machine and instrument making 30832888 PJSC Azovmash 50 05762269 JSC "Turboatom" 75,2241 + 00213121 State Enterprise "Plant "Electrotyazhmash" - + 32495626 State Enterprise "Dniprovsky Electroconstruction Plant" - + Chemical Industry 05766356 PJSC "Sumykhimprom" 99,9952 + 00206539 PJSC "Odessa Port Plant" 99,5667 + 38983006 Zaporizhzhya Titanium-Magnesium Combine Ltd. 51 + Manufacturing industry 05743160 OJSC "Oriana" 99,9988 Health, culture and sports 30058128 PJSC "President-Hotel" 100 21680915 PJSC "Indar" 70,7016 + Agricultural industry 30401456 State Joint-Stock Company "National Joint-Stock Company "Ukragroleasing" 100 What will we have? The privatization "successes" of the previous years show that the achievement of the goals set by the government will be complicated. Even though the government expects to receive the largest sum from privatization-2018 in the amount of 22.5 billion UAH in the last 10 years, the new consensus forecast of the Ministry of Economic Development already speaks of the probability of receiving only 1.25 billion UAH, which is twice lower of the amount of privatization sum in 2017. Accordingly, there is a risk of non-fulfillment of the revenue part of the budget, which is planned at the level of 913 billion UAH, by 2-3%. Table. Implementation of the privatization plan in 2014-2018 Year Plan, billions UAH Fact, billions UAH Plan fulfillment, % 2014 0,335 0,466 139,1 2015 17 0,151 0,9 2016 17,1 0,188 1,1 2017 17,1 3,4 19,9 2018 22,5 - - In turn, the following factors will contribute to the reluctance of investors to participate in the privatization-2018: ● Technical barriers to tenders and complexity of procedures ● Weak institutional capacity of the State Property Fund of Ukraine ● Limited competition and access to trading ● Significant dependence of enterprises on government decisions and the actions of the oligarchs ● Political and lobbyist games around enterprises ● Complicated "debt history" of enterprises and their unsatisfactory financial condition ● Pre-election turbulence ● Situation in the east and the risks of nationalization Thus, the interest of investors will depend directly on how the sales will be organized. Despite the fact that the privatization process will be quite transparent, a number of barriers remain: for example, there may be technical restrictions on trade access or price manipulations at bidding. And even if a diligent investor buys such enterprise, conditions can be created under which he will not be able to pull the company out of poor financial state. Therefore, the privatization plan of this year is unlikely to be fulfilled, due to foreign and Ukrainian investors are not in a hurry to invest in Ukraine without knowing how the development vector will change with the election of a new president and parliament. In addition, some investors are afraid of the threat of nationalization of purchased objects, remembering what happened to Privatbank. The results of the bidding can easily lead to a situation where "they sell for themselves" and, moreover, at low price. This is evidenced by the fact that biggest part of trades is planned to be held in fall and actually may begin much later with the aim to quickly sell the objects, fearing the arrival of the big investors. In turn, even if this "enlarged" privatization campaign succeeds, it should be noted that: ● privatization cannot serve to close the budget holes. ● there will be a threat to the country's economic security in case of situation worsening in the Eastern part of Ukraine: under circumstances of necessity to reorient the production it will be more difficult to conclude agreements with investors. ● individual interests of investors may contradict the national one: there is a risk that investors will dictate their conditions and will make the key sectors of the Ukrainian economy dependent. ● Ukrainian state-owned enterprises can be bought by those who aim at buying the assets cheaply (in the absence of large investors) or at eliminating the competitors. Privatization 2018 may simply turn into a simulation that will cover the pre-election activatisation of the redistribution process of the spheres of influence or the “giving the gifts” process. ● the issue of Naftogaz monopoly and the issue of the partial privatization of organization will not be resolved. Naftogaz will remain fully state-owned and its functions will not be divided between individual independent companies in accordance with the European requirements regarding the system of distribution of functions in the energy market. ● significant responsibility will delegated to the Antimonopoly Committee of Ukraine. "Wholesale" privatization of enterprises of the same sphere can lead to the creation of monopolies in the market, which is highly undesirable, especially in the chemical industry and other key sectors of the Ukrainian economy. ● the problem of Ukrainian enterprises is not in the type of ownership, but in poor management and excessive monopolization of the market. Any company can be managed well or badly regardless of its ownership type. On the other hand, the foreign investors could contribute to: ● redistribution of the market, increased competition, even greater demonopolization, weakening of the "dictatorship" of individual companies. ● receiving currency income and, as a result, strengthening the exchange rate of the Ukrainian hryvnia. ● increase in the number of relatively stable companies: stability will be due to foreign capital, which is not tied to hryvnia and to the economic situation in Ukraine. Thus, investments in privatized enterprises can provide significant support to the country's economic growth. However, this can only be done under condition of a sound public policy, which will be aimed at protecting the national interests, and not only the individual interests of investors. Otherwise, privatization will bring nothing useful to Ukraine - no money to the budget, no investments in production, no skillful management for enterprises, no implementation of recommendations of international donors and organizations.