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How could Ukraine get out of crisis: Declare default and attract Chinese investors

Author : Olexandr Honcharov

19:09, 16 March 2017
How could Ukraine get out of crisis: Declare default and attract Chinese investors

Author : Olexandr Honcharov

From the history of previous defaults in the countries that declared them, economic growth resumed the following year

19:09, 16 March 2017

Read the original article at 112.ua

112 Agency

It’s really difficult to predict when strategic investors from European markets will turn in Ukraine’s  direction. Now our financial system is rather unsteady. The time will come when all collected taxes will have to be directed to servicing the public debt.

This is absolutely unacceptable. If this key problem is not solved through economic growth, then we have only three options: 1) inflation, 2) state default or 3) debt repayment. But who is now strong enough to save Ukraine? After all, the debt crisis can strongly push the collapse not only of the Ukrainian economy, but of the state as a whole. Yes, the future is far from beautiful. And to avoid the end with inflation or default, of course, we need someone to buy our debts. But who in Europe can afford to get involved in such a megaproject?

Accordingly, the Cabinet of Ministers of Volodymyr Groysman must do something quickly with the financial system and the economy of the country in order to try to get out of this debt crisis. It is also clear that he has a rather small choice of measures and tools to stabilize this difficult situation. Even measures to eliminate the current budget deficit and transfer it to a surplus regime (at least in the primary surplus mode) in order to reduce the specific costs of servicing the public debt - can solve these problems only partially.

And what is the main thing? The key or the main for the size of the future national debt of Ukraine is, first of all, the ratio of interest rates on Ukrainian government bonds’ market and the growth rates of the nominal GDP of the country. In this regard, leading analysts predict such dependence. For example, if Ukraine's GDP (even in nominal terms without an adjustment to the level of inflation) will grow at a rate of 5% -6% a year at the current bond servicing rates, then the public debt will begin to decline rapidly.

Here is another question: is it possible at all to increase our GDP by 5-6% in the current difficult economic conditions? When the risks of stagflation (rising unemployment plus inflation) are becoming more and more real for us. Moreover, our modern monetary policy does not presuppose ways to combat stagflation. After all, high levels of public debt, big taxes and low nominal rates - they actually hinder to make a maneuver. Note that in 2017, payments on state debt at the expense of the budget funds will amount to 240.897 billion hryvnia! And what should we do? There are yet no answers both from the representatives of the financial and economic block of the government, and from the Verkhovna Rada.

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In addition, we have recently observed a huge budget crisis, i.e. we will no longer be able to borrow cheaply on international financial markets. And, of course, everyone is interested, where will be directed $ 1 billion loan of the International Monetary Fund, which Ukraine expects to receive by the end of March this year? I think most of it will be used for direct financing of the budget deficit; the rest will be used to support the balance of payments. Well, also I admit, someone will "saddle" these financial flows.

But, here's the question - who and how in the Cabinet is going to serve a record national debt? And we must honestly say that there is the risk that our government and the National Bank have written it into the current economic system. And this risk is permanently revealed itself in the serious weakening of our national currency. In this situation another and more powerful turn of the hryvnia devaluation is waiting for us. But the only currency that will now feel stable regardless of the fluctuations of the US dollar, euro and, of course, the hryvnia - is the Chinese yuan.

Therefore, already in 2017, China and Ukraine need to start economic and strategic dialogue. I would propose one topic for discussion - this is an increase in the export of Chinese capital to Ukraine. After all, companies from China already acquire our production capacities and create jobs. In fact, more and more investors from China come to our country. However, if Ukraine’s infrastructure is built by the Chinese business and on their money, it is unlikely that pragmatic Chinese entrepreneurs, who surprised the whole world with their economic miracle, will be so generous to suddenly launch such a mega-project without any benefit for themselves. Therefore, we must prepare to sacrifice something.

But if now we can’t economize on the quality of Ukrainian products and if labor productivity can’t be sharply increased, then employers will only have to reduce wages to their workers and specialists. And we are oh how far from Europe, where low costs, high quality and brands are the main ingredients of their success. Therefore, today the main task is to ensure that Ukrainians life standards and incomes significantly do not decrease lower than maybe not European, but at least the Chinese level.

And when they say that already several tens of thousands of small and medium-sized business entrepreneurs have collapsed their business, well, I do not believe these statements. They did not collapse their business, but simply went into the shadows. Why? Because the big bureaucrats who occupy high offices in power today, they simply pushed them out. Bright evidence of this was a rally of businessmen last week in Ivano-Frankivsk. Such a reaction of entrepreneurs will be shown in other cities and regions soon.

So the result is as follows: either we will be lucky and with the help of strategic foreign investors, Ukrainian economy will show a fairly steady growth, for example, at least 3.5-4% of GDP per year (yes, maybe this is fantasy, but we want to believe); or we will increase inflation and thereby depreciate our national debt as a percentage to GDP of the country in an inflationary way. Yes, these are tough, but objective conclusions. I would like to stress once again that for the generals of the Ukrainian financial and economic power in the short term there is no choice at all.

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The Cabinet will inevitably have to cut government spending. This is a bad scenario for the economy, because Domestic demand will shrink, which will generate an even greater reduction in revenues received by the budget.

If default on state bonds will take place, then the growth of our economy will be postponed for half a year. And the equilibrium point can be reached at the level of a much deeper economic downturn. In addition, the government cannot support a budget incentive program. This is also a heavy blow to the prospects of Ukraine's exit from the crisis. Therefore, my proposal: to enter the growth trajectory, we shouldn’t have to continue to pay the national debt, but declare a default. It is already inevitable. From the history of previous defaults in the countries that declared them, economic growth resumed the following year.

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