Predictions for 2016: Ukraine's ten expected economic shocks

Author : Olexandr Honcharov

Source : 112 Ukraine

Ukraine faces high risk of GDP fall, budget deficite, poor investment activity, and medium-sized enterprises default - expert
09:40, 29 December 2015

Recent scandalous clash between Odesa governor Mikheil Saakashvili and Interior Minister Arsen Avakov, the notorious case of ex-deputy head of Dnipropetrovsk regional administration and member of "Ukrop" party Hennadiy Korban prove that Ukrainian government is playing a very tricky game. Instead of developing common approaches and national programs for the sustainable development, various elite groups start uncompromising opposing against each other, using the fight against corruption as a pretext to neutralize the political rivals.

This process seems to have active outside support. And what do we have now, at the end of 2015? Ukraine's ruling elite is fragmented, social tensions and protests are getting stronger, appropriate decisions on reforming of the Ukrainian economy are not made. What might Ukraine face in 2016? Let us highlight the top ten risks of the next year.

Risk one. Now no one doubts that the situation in the Ukrainian economy is close to catastrophic. Predictions of the World Bank are very disturbing: by the end of 2015 Ukraine's GDP would fall to 12%, while previously only 1% fall had been forecasted. European Union, the U.S. and the IMF has not appreciated the efforts of our government. Therefore, there are no any tranches or loans from the IMF. Europe and America has no fiscal space to give us a loan. If the fight against corruption fails and the reforms do not work, Ukraine will get no more money. The U.S. Vice President Joe Biden was the first who voiced it so openly and harshly, although it was clear for a long time. The miracles do not happen in the western pragmatic policy, even during the New Year night.

Related: IMF will come to Ukraine

Risk two. We look forward As for the next year, a double-digit inflation, as well as a negative trend in the economy, is expected. The budget deficit is unlikely to stop in the planned 3.7% of GDP and might beat a new anti-record. According to the analysts of the World Bank, the external debt of Ukraine is expected to reach 153% of the GDP in 2015, while the National Bank of Ukraine predicts 44-45% inflation at the end of the year. This means that there is a high risk of default in the first six months of 2016.

Risk three. Where are those foreign markets, where our manufacturers might sell their products in a free trade zone between Ukraine and the EU? If Ukraine does not create the Export Credit Agency at the beginning of 2016, and does not advance to the European markets, it will be another economic shock for the country. It is essential to adopt a law of on the ECA and form a network of development actors, including the Ukrainian Bank for Reconstruction and Development, as well as joint investment institutions on the basis of public-private partnership. Otherwise, the balance of payments will worsen in a deeper crisis.

Related: Russia suggests free trade zone with Ukraine in case of concerted efforts

Risk four. As in 2015, and in 2016 we will spend more money than we actually earn. Accordingly, the size of the budget deficit will decrease with respect to Ukraine's GDP (it will increase by 7.79 billion UAH). In addition, the national debt continues to grow. In 2016, the country will have to pay on its external and internal debts of 135.2 billion UAH (about 5.7 bln USD, excluding 3 bln USD debt to Russia). By the way, the total amount of debt payments on external and domestic debt in the next 4 years will be about 47 bln USD: foreign debt - 30 bln USD, internal -17 bln USD. Therefore, all hopes relies on an increase in financial assistance from the IMF. If the Fund does not increase the aid program, is means collapse.

Risk five. The recession is likely to continue in the first half of 2016. Moreover, the domestic industry cannot stand the high lending rates of commercial banks. Two or three of these cash-strapped months in 2016 will lead to losing half of the processing facilities. None of the real sector entities will not sustain lending to commercial banks the 22% discount rate per annum.
Risk six. Corporate defaults of some large and medium-sized enterprises will continue in 2016. According to the forecast of the Moody's International rating agency, the assets and bank reserves will decline and the amount of system-wide problem loans will increase. Moody's analysts forecast that Ukrainian banks will have difficulty with the repayment of their foreign loans, which will be received in 2015-2016, and the country's banking system will losing money for several years. Accordingly, the crisis in the corporate sector will continue to grow and in 2016.

Related: The EU to provide Ukraine with EUR 200 mln of macroeconomic assistance

Risk seven. The ordinary citizens would be just unable to survive after systemic crisis expressed by the end of 2015: 97% devaluation of hryvnia and 45% inflation. The appeals of Ukraine’s authorities to "tighten the belts", eat less and work more, will only strengthen mutual distrust, what would be one more step to the next economic shock.

Risk eight. In 2016, 35 bln UAH (1.5 bln USD) are allocated for payment of housing subsidies (in 2015 it amounted to more than 1 bln USD). Ukraine will firmly remember 2015, a year of unprecedented growth in utility tariffs, and multiple increase of gas prices, which led to an increase in electricity and water tariffs. As a result, lower incomes made every third family to be insolvent. At the same time, in 2016 Ukraine will have to give up many of the projects that had been expected. Sharp decline of the investment activity and the inability to continue to pay the previous loans might lead to the catastrophic breakdown of housing and communal services projects.

Related: The economy in the area of high turbulence

Risk nine. Taking into consideration the previous risks, crisis it is not so bad. The main trouble of Ukraine is a way of getting out of this crisis. After the shocks on Ukrainian currency market, it would be correct to dismiss the head of the National Bank. There should be a signal to the civil society that the representatives of the central government are accountable for their grave economic mistakes and miscalculations. Otherwise, impunity will perish, what literary means "playing with fire" and inciting new protest.

Risk ten. Today's New Year's Eve boom will change into a long and deep recession of consumer activity in the first half of 2016. Seasonal agiotage and significant price increases will force Ukrainians to spend all their savings spend in December 2015.

Related: Capping 2015: Russia and its Year of Wars

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