I got acquainted with the "Report on financial stability" of the National Bank. Let’s talk about a few passages of this documen.
On the one hand, it is argued that in case of to continued structural reforms, receipt of planned tranches from the IMF and the absence of significant macroeconomic shocks in the baseline scenario, the government and government-guaranteed debt will decline to 50% of GDP by the end of 2020 and 48% by the end of 2021.
On the other hand, payments by the government and the National Bank in 2020-2022, together with interest, will exceed $ 24 billion. Most of this amount will need to be refinanced in foreign markets. Repayment and servicing of foreign currency public debt is a key medium-term challenge.
I note the qualitative approach of the compilers of the report - they justify the forecast with many reasons. It is responsible and professional. I want to address my question not to those who worked on the “Report on Financial Stability”, but, so to speak, higher and wider - what will happen if credit cooperation with the IMF cease or if something will be wrong with structural reforms (so far it hasn’t worked out very well)?
Or even worse - if in the next 2-3 years a recession in the global economy begins, which will be accompanied by an outflow of capital from developing countries and, consequently, will lead to greater complications with refinancing the public debt of Ukraine by attracting capital from foreign markets?
Moreover, what will happen if the so-called perfect storm takes place? I mean a rare combination of circumstances drastically aggravates the event.
Is such a situation possible? Maybe. For example, in August 1997, a year before the global financial crisis, the Dow Jones Index fell 7.7% in one trading session. The outstanding economist and mathematician Benoit Mandelbrot estimated the probability of this event to be one in 50 billion.
And regarding the fall of the Dow Jones index on October 19, 1987 by 29% in one day, Mandelbrot wrote that, according to the standards of financial theorists, this event could take place in one of 1050 cases. This is so unlikely that mathematicians believe the forecast does not make sense, because this number falls outside the standards of nature. However, for the New York Stock Exchange, the meaning of the trading day on October 19, 1987 was extremely clear. And very sad for many of its operators.
I do not escalate the situation. However, I see the expectation that everything will turn out well. But there are signals that are alarming. In recent years, the main hope in Ukraine has been placed on the agricultural sector. It provides an inflow of foreign currency, which is necessary for servicing and paying off the debt, which is estimated at $ 24 billion over the next three years. But recent statistics are worrying.
In November of this year, the agricultural production index compared to November last year decreased in physical terms by 18.5%. This is the worst result since 2014, when fights in Donbas were in full swing. You can look for explanations in nature - unusually warm weather has led to the fact that the harvest has shifted somewhat in time, growth in the agricultural sector in the second and third quarters fell.
On the other hand, we have an exceptionally record crop – 74,3 million tons of grain and leguminous crops as of the end of November, compared to 70,1 million tons for the entire last year (an increase of 6%). But in January - November of this year, the agricultural production index in comparison with the same period last year grew by only 2.4% (in physical terms).
And if you look at October - November 2019 in comparison with October - November 2018, then the index drop is 8.8%. There was a decrease in the agricultural production index in the fourth quarter, this will make a corresponding contribution to the dynamics of GDP, which is likely to slow down in the fourth quarter. It began to decline earlier: while in the second quarter GDP growth was 4.6% compared with the first, then in the third quarter it was 4.2% compared to the second.
There are prerequisites for a slowdown in growth in the agricultural sector, which is the locomotive of Ukrainian economy. At the same time, the situation on the international markets for metal products and metal raw materials continues to be complicated, and this is the second most important export position of Ukraine.
What to do? Do not rely on luck, privatization, deregulation and liberalization. A proactive economic policy is needed, including top-down intervention and export focus. Export growth is necessary, such a model in the post-war history led to success.
Starting from the export of raw materials, redirecting part of the rent from the export of raw materials to the technological innovation sector, it is necessary to gradually switch to high-tech export within the framework of industrial policy.
The strategy is clear - to climb the same technological ladder that developed countries once climbed, moving from the simplest technologies to the forefront of innovation and using the low cost of labor to remain competitive until technologies are created and the necessary capital is accumulated.
The government should create greenhouse conditions, play the role of a “midwife” of economic development. This requires a lot of attention to the manufacturer. The resulting economy will first be skewed by the export-oriented sector. But these are the costs that must be incurred, because as a result of such development, the industrial sectors of the fourth industrial revolution will be created in the country. This will be the best option for structural reforms.
Otherwise, total deindustrialization awaits Ukraine, since domestic demand for industrial products is clearly insufficient for the existence of highly competitive industrial sectors.
If this strategy is implemented, then the macroeconomic shocks presented in the “Report on Financial Stability” will have a less dangerous impact on the state of the Ukrainian economy. And the ratio of public debt to GDP will decrease - both due to GDP growth, and due to a reduction in public debt, the need for which will be reduced.
Of course, the likelihood of an “ideal storm” is not so high. But the probability of Dow Jones index falls was much less than the statistical error. What did not save the world from colossal shocks.