The situation when inflation is not transformed into devaluation is atypical for Ukraine, usually the hryvnia devaluates to the level of consumer inflation and even deeper.
Inflationary water, like its physical prototype, cannot be compressed, which means it will accumulate inside the economy, like a river in front of a dam. Seasonal cyclical fluctuations, when the national currency is permanently depreciated, partially reduce this pressure, but not completely. At the moment, the “accumulator” has already received 10–15% of the unused devaluation wave, and its realization is only a matter of time.
This imbalance is rather effectively absorbed by private transfers, that is, money from labor migrants. But we are almost at the peak of the size of cross-border transfers, and their further growth will gradually slow down. The eurozone economy is on the verge of slipping into a growth model at the level of statistical error (1.5%), which will inevitably affect the already prolonged mega-successful period of growth of the Polish economy.
Finding a job in Europe will be harder, and harder to earn the necessary income to live abroad and finance a family in Ukraine. According to the UN Global Investment Report, a group of countries in Central, Eastern and Southern Europe will face the most significant slowdown in growth, and the German economy will “slow down” to + 1% of GDP.
This means that the full-flowing river of labor transfers will gradually turn into a silted Dnipro at the end of summer. Consequently, further attraction of loans from international financial organizations under the conditions of "reforming" the country or from the private capital markets at high interest rates will be without alternative in the current paradigm of economic development.
In this context, the promises of the Ministry of Finance to reduce the debt / GDP ratio to 43% by 2022 were very "funny". As of the beginning of this year, direct public debt (excluding guaranteed) dropped from a critical 60% and above to 52.3% of GDP. By the end of the year, the government promises another “teaspoon” of decline: the indicator will drop to 52%.
But this is a hidden manipulation, since when calculating an objective indicator of debt burden, it is necessary to take into account more than $ 10 billion of guarantees issued by the state: taking into account guaranteed debt, the figure is 59% of GDP (for the first quarter of the current year), and this is not much different from the critical value of 60%.
But the reduction of the relative indicator for direct debt took place not because we strained all our forces and began to return debts, but as a result of a combination of the factors mentioned above: nominal GDP in hryvnia increased in 2018 by 20%, or almost 580 billion hryvnia, compared to 2017 year.
The denominator of the debt / GDP formula has changed - it has grown significantly. At the same time, the hryvnia rose by 1.4% last year, and this means that the currency debt, in terms of national currency, decreased proportionally. Thus, the numerator of the formula is reduced. As a result, the Ministry of Finance could rest, and the debt-to-GDP ratio would still fall, even if Ukraine did not pay a single cent to the creditors.
Realizing that this process will not be eternal, the government hastened to consolidate the benevolent indicators in the state strategy for managing sovereign debt, where they mentioned both the achieved milestones and the fabulous future, when “suddenly out of nowhere” our debt will fall significantly.
Here it is important to talk about the debt / GDP indicator and its value of 60%. The figure arose not by chance, it is laid down in the Maastricht EU criteria and shows the critical value of debt, subject to the achievement of two basic parameters: a budget deficit of 3% and GDP growth of 5%. In fact, the indicator is calculated as the ratio of the above structural beacons: 60% = 3% / 5%. Using this formula, it is very easy to calculate the desired indicator using the matrix of possible values of the basic factors.
To reach the indicator of 50% of debt to GDP in conditions of low rates of economic growth (2% on average), it is necessary to keep the budget deficit at 1%. For Ukraine, this is still unattainable, because we can hardly withstand the parameters of the state budget deficit at the level of 2.5-3%.
With the help of an undervalued hryvnia exchange rate that is budgeted, fiscal payments tied to the rate are artificially increased: import VAT, duties that are levied on imported goods (budget-generating revenues). Not to mention the profits of the NBU, which also goes to the budget revenues and which can be increased by ten billions by a simple movement of the hand due to the “dissolution” of the regulator’s reserves.
Taking into account this “fraud”, the real budget deficit in Ukraine is more than 3%, but even if we take 3%, then for the debt-to-GDP ratio of 60%, we will have to “grow” in the range of 5% +, and this is a fantasy with the current economic policy.
The only thing that saves us is the fact that the above formula uses nominal growth rates, and our GDP grows nominally by 20%, which in a stable exchange rate provides a positive effect. But this will not always be the case, and a slowdown in the growth of the GDP deflator paired with the devaluation of the hryvnia will very quickly return the debt / GDP ratio to a zone above 60%, especially since the new government plans to actively “load up its debt” in the fall.
The growth of the external debt of any country occurs as a result of the excess of domestic expenditures over revenues - as a result, such a country buys more imported goods than exports its own, increasing the negative current account balance. The trade balance deficit is compensated by a positive balance on the financial account, which is formed by attracting loans and selling national assets to non-residents.
As a result of the functioning of such a model, such a country becomes a net borrower. The net debt formation model can have a productive and unproductive form. In the first case, expenses exceed incomes due to the investment boom, in the second - as a result of banal consumption. In Ukraine, the “classic” is just observed: household spending exceeds income, the budget is scarce.
In these conditions, the deficit trade balance is programmed, and its compensation is carried out through labor transfers from abroad and foreign loans.
So far, Ukraine is moving not toward foreign investment, but into the “middle income trap”, when, as a result of the demographic crisis characteristic, the country is in the trap of the long development of the economy, labor productivity and, most importantly, in a state of meager growth in real incomes of the population in the form of wages and pensions.
Scientists point to ways out of the “poverty trap”: investment growth and investments in the education sector. This is the only way to avoid a slowdown in economic growth, as it was done in South Korea and Chile.
In relation to the parameters of external debt, we essentially have three options: exit from the “average income” trap and the transition to a model of economic growth at the level of 5% +. In this case, debt reduction due to GDP growth and budgetary discipline is quite real.
The second option is a low growth rate against the background of a budget deficit of 2-3%. This is the way of permanent replacement of old debt with new one and "re-lending". At the system level, a country in this situation will never remove a debt noose from its neck.
And the third option: maintaining low rates of economic development (current situation) against the background of a tight monetary policy of the National Bank to pacify the GDP deflator, when the amount of debt service exceeds nominal gross product growth.
This is almost a fait accompli, because the budgeted payment of debts in 2019 amounted to 460 billion hryvnia, and this is comparable to the increase in nominal GDP.
In this case, to pay off debts, it will soon be necessary to ensure a budget surplus, that is, to “cut” all social and infrastructure articles, in a word, to de-socialize the state and de-industrialize the economy. Which option the new government will choose? I think the choice will be made between the second and third scenarios.