Ukraine's debt accumulation bubble

Author : Olexandr Honcharov

Source : 112 Ukraine

The structure of the state economy is rapidly transforming from agrarian-industrial to the commodity economy with the inflating of financial bubbles, which would soon burst with a scandal
18:21, 13 August 2018

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Who now needs a manufacturing economy in Ukraine? First of all, we should honestly admit that the structure of our economy is rapidly transforming from agrarian-industrial to the commodity economy with the inflating of financial bubbles, which would soon burst with a scandal.

August 7, the Ministry of Finance placed hryvnia and foreign currency bonds of the domestic government bonds (FCB) for a total of 0,37 billion USD. Hryvnia bonds with a maturity of 91 days, 175, 329 and 672 days were offered for placement; nominated in dollars for 105 days and 203 days, and denominated in euros for 77 days. In particular, three-month FCB were placed at 0,06 billion USD and six-month ones – 0,038 billion USD at the rate of 18% per annum. From the additional placement of USD-denominated bonds with a circulation period of 203 days, 56.46 million USD (at a rate of 5.89%) were received, and euro-denominated FCB with a circulation term of 77 days were placed in the amount of 69.01 million EUR (at a rate of 4.39%).

It is important to note that in July, 835 contracts on transactions with government bonds for the amount of 0,43 billion USD were signed on the "Perspective" stock exchange, and since the beginning of 2018 - 3,899 contracts were signed for a total of 2,6 billion USD! And now think about what Ukrainian producer will be able to enter the borrowing market with its corporate bonds, whose interest income is also taxed 19.5%, and FCB with high percentages of income remains without taxation at all?! Such quickness of our authorities is absolutely clear: according to the State Treasury, at the beginning of August, only 0,07 billion USD has remained at the single treasury account. This is 22 times less (!) than the same date last year (by the way, then it amounted to 1,6 billion USD).

According to the official data for 7 months of this year, the plan to implement the revenue side of the budget is underfulfilled by more than 0,59 billion USD. We should not keep the hope that the Cabinet of PM Groysman will be able to restore financial losses, because these ministers have brought the situation to the point where the Ukrainian economy actually stopped earning, and the government only spends and asks for loans from everywhere. By and large, there is a complete sale under a record 18% interest per annum of the future income of our economy.

Maybe, the enterprises now should take credits, but is there any economic expediency for the producers in this? After all, the discount rate of the NBU today is 17.5%. Therefore, for the first half of the year banks have received 0,3 billion USD of net profit and not the real sector of the economy. Plus, credit institutions have increased their portfolios of bad loans. At the same time, the Bank of England retains the key discount rate at 0.5%, and the European Central Bank (ECB) generally holds at 0%.

With whom our national producers are going to compete in the EU countries? Or are they going to reduce the cost of Ukrainian products, and then it will be necessary to devalue the hryvnia, and employers will freeze the wages of their employees?

Unfortunately, our expectations are getting worse and worse. The politicians have not created a system of military and scientific and technical forecasting in Ukraine. The complex system of interaction of state and private institutes of scientific, managerial, financial, investment, innovation, marketing directions do not work, whose main goal is to become an instrument for implementing the strategy of economic development, or, more precisely, to transform Ukraine's development model from passive to active expansionism.

And yet, what exactly should we do to make Ukraine's economy work? First, start providing long-term loans (primarily state-owned banks) with the following goals:

- creation of the new enterprises in priority sectors of the economy;

- modernization and reconstruction in both the public and private sectors on terms that take into account production cycles and its profitability;

- under the obligations regarding the indicators of labor productivity, the level of management and marketing at enterprises of the real sector of the economy.

Secondly, it is necessary to assist Ukrainian exporters in their expansion to foreign markets, to provide state guarantees on contracts. Thirdly, to stimulate the attraction of investments, constantly supporting investors' interest in Ukraine, organizing exhibitions, road shows, conferences and other events. Fourth, to capitalize innovative companies by entering into the capital of enterprises with innovative perspectives, on the terms of the public-private partnership, their support and subsequent sale of the state package to a private investor after the growth of the value of assets.

In conclusion, my prediction: we do have not reached the bottom there, as PM Groysman notes, it is still ahead. The question is whether we would reach the bottom by the end of 2018. No, everything speaks for the fact that by the end of this year the economic situation will not calm down, the downward movement will continue. And this becomes clear not only for the opponents of power but for an increasing number of people, quickly changing their system of views on what is happening.

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This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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