25 October 2016

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Week’s balance: 100 days of Groysman’s Government, failure of OPP privatization, and IMF tranche delay

The Government led by Volodymyr Groysman has marked the first 100 days of its work; the attempt to sell the state-owned Odesa Port-Side Chemical Plant has failed; while the International Monetary Fund has postponed a decision on the allocation of a third tranche of the loan for Ukraine – these are the main economic news of the past week. 

The past week was marked by significant economic news / www.onehourtranslation.com
The past week was marked by significant economic news / www.onehourtranslation.com

The Government of Volodymyr Groysman, who took office on April 14 as a result of a compromise between the President and the team of ex-Prime Minister Arseniy Yatsenyuk, has marked its 100 days of work. During the past three months, the new Cabinet resumed talks on cooperation with the IMF; however, it has not yet managed to get another tranche of the loan. The newly-appointed Cabinet has begun reforming the State Fiscal Service and the Customs Service and signed a free trade agreement with Canada. It also raised energy tariffs for the households and liberalized drug market by eliminating unnecessary licensing.

A timid economic recovery has also played in the hands of the new government team. In the first quarter of 2016, the national economy grew by 0.1%, which gives reason to expect a 1-1.5% GDP growth at the end of this year, compared with a 9.9% fall in the past year.

The sign of Ukraine’s gradual exit from a deep economic crisis became the figures on retail trade turnover, "We see positive signals today in the development of the national economy and stabilization, including that of the national currency. These are good signals, but we must understand that we need to improve upon them so that growth can be more substantial and people can see the results," said Groysman.

The experts were, however, cautious in their overall assessment of the new government’s initial period. According to a director of economic programs at the Razumkov Center Vasyl Yurchyshyn, the government should not act based on conservative estimates. "I wouldn’t say that the claimed economic growth of 1-2% [for 2016-2017] is the result of some extremely revolutionary reforms. Rather, it is an indicator, which characterizes the minimum self-sustainability of both the economy and economic subjects. In order to achieve economic recovery following the fall caused by various actions and events, growth is essential for several years, at least a minimum level of 7-8%,” the expert said, noting that most of the credit for economic stabilization belongs to the previous government of Arseniy Yatsenyuk.

The fragility of the achieved stability is emphasized by the dynamics of industrial production. The data published by the State Statistics Service last week show a 3.4% decline in industrial production in June, with the largest drop recorded in the coal industry, oil production and refining, as well as in the production of furniture. However, overall dynamics of industrial output since the beginning of the year remains positive showing a 2% growth (January-June).

At the same time, implementation of the basic tactical tasks of the Cabinet, including the receipt of the next tranche of loan from the IMF, as well as conducting a transparent and effective privatization, has been significantly delayed. This fact causes the greatest concern with regard to the country’s future economic dynamics.

Overpriced asset

The attempt to sell the state-owned OPP failed / Photo from UNIAN
The attempt to sell the state-owned OPP failed / Photo from UNIAN

The Ukrainian leaders had vowed to start large-scale privatization in the autumn of 2015, amid the calls of international partners and national experts who consider the sale of state assets the only way to reduce the level of corruption in the public sector.

But the beginning of the privatization was being postponed due to various objective and subjective reasons. Among them is the war against Ukraine unleashed by Russian President Vladimir Putin, which led to the annexation of Crimea and destruction of the industrial potential of Donbas; and the delay in the adoption of an up-to-date legislation regulating privatization.

Only in mid-May did the Cabinet of Ministers approve the terms of the privatization of the Odesa Port-Side Chemical Plant. A 99.6% stake in OPP had a starting price of UAH 13.175 billion (equivalent to $532 million). However, the tended scheduled for July 26 will not be held as a week before this date, it became clear that the yet another attempt of the authorities to sell the chemical giant has failed: The State Property Fund has revealed that there were no bidders for OPP.

Among the reasons for the lack of interest in the plant, the experts call the inflated price of the asset, the outstanding OPP’s debt of $193 million for gas deliveries in 2013-2014 to Ostchem (owned by Ukrainian businessman Dmytro Firtash), and restrictions on withdrawal of dividends from Ukraine.

The interest in buying OPP was earlier shown by Norway’s Yara, the U.S.-based IBE Trade, Koch Fertilizers, CF Industries, and Poland’s Ciech.

According to the SPF chief Ihor Bilous, the Fund has established a working group whose task will be to draft offers for the new sale attempt, which will likely take place as early as this fall, with the starting price decrease by 30%.

First Deputy Prime Minister, Minister of Economic Development and Trade of Ukraine Stepan Kubiv confirmed the likelihood of lowering the starting price and said the tender may be held in October 2016.

Stepan Kubiv: Privatization will continue ... We plan to do it in October / Photo from UNIAN
Stepan Kubiv: Privatization will continue ... We plan to do it in October / Photo from UNIAN

"This is an experience that will allow the government to continue privatization in Ukraine, taking into account the risks and the real price in the market… Privatization will continue ... We plan to do it in October," said the deputy prime minister.

Despite the fact that the failure of the OPP privatization attempt is seen in the government circles as some positive experience, which will help avoid mistakes in the future, a high risk of a failure of the whole privatization plan for 2016 in now obvious.

IMF tranche is postponed


The government’s economic bloc since the resumption of negotiations with the IMF has been assuring the public that the meeting of the Executive Board of the Fund on the allocation of the third tranche for Ukraine will be held in the second half of July.

The Ukrainian officials only changed their rhetoric after the IMF published the official schedule of the meetings of the Executive Board before the start of the summer holidays. And the Ukrainian issue is off the agenda during this period, as it appeared.

IMF spokesman Gerry Rice said that in early August, the Executive Board goes on a traditional three-week vacation. In this regard, the meetings will only be resumed in late August – early September. Rice did not rule out that the Ukrainian question concerning the second revision of the cooperation program, approved in March 2015, will be held in September.

Meanwhile, Volodymyr Groysman previously argued that Ukraine had fulfilled all the key beacons of a reform program, both in the government line, and that of the Parliament, therefore he expected the Fund’s approval of the work done as well as the allocation of the third tranche in the amount of nearly $1 billion.

According to Finance Minister Oleksandr Danylyuk, who called the postponement a "slight delay", the government is still expecting to receive three IMF tranches before the end of the year.

Danylyuk: The government is still expecting to receive three tranches from the IMF before the end of the year / Photo from UNIAN
Danylyuk: The government is still expecting to receive three tranches from the IMF before the end of the year / Photo from UNIAN

"Until the end of the year, regarding the IMF, there is a preliminary plan for three tranches worth $4.3 billion. And we expect to receive all three tranches. But the question is not just about money. It is also about two assessments. If there is a positive [assessment], this means we are moving the right way in our reform program. And it's a signal more valuable than the IMF money," said the finance minister.

The next week of July promises to be full of important economic news – it will be the final period of preparation of all government agencies and businesses to switching from August 1 to Prozorro, the system of electronic public procurement.

In addition, the meeting of the National Bank's monetary committee will be held July 28. The central bank may decide to reduce the key rate and go for some other forms monetary easing.

The farmers, who have started an active phase of harvesting, have already threshed 20.2 million tonnes of grain with the projected total yield of 60 million tonnes.

Maksym Shevchenko (UNIAN)

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