Week's balance: Economic outlook by World Bank, delay of large-scale privatization, and 100% readiness for winter
The government reported its readiness for the heating season and approved the starting price and terms of privatization of Centrenergo, while the sale of other state assets was once again postponed to the next year; the World Bank announced its outlook for Ukrainian economic growth and reiterated its call on the country's leadership to continue implementing reforms – these are the main economic developments of the outgoing week.
This week, First Deputy Prime Minister, Minister of Economic Development and Trade Stepan Kubiv said that the forecast for the Ukrainian economy growth remained positive, aiming to reach over 3% for 2018.
"More importantly, this is not about some speculative warmup of the economy, it is about real economic growth. The Ukrainian industry is growing,” he said.
According to the official, the industrial output in January-August was up 2.2%, chemical production grew by 29.9% compared to the same period last year, while the automotive industry saw a 17.2% rise.
Kubiv noted that the exports of Ukrainian goods have continued growing over the past 19 months, reaching $26 bln in first seven months of this year.
At the same time, the World Bank downgraded its outlook for Ukraine's GDP growth in 2018 to 3.3% from an earlier 3.5%. Moreover, such rise will take place if Ukraine reforms are further implemented, and an agreement is reached with the IMF on continued cooperation, the World Bank says.
This will send a positive signal to investors, said Faruk Khan, a lead economist and program leader for the World Bank for Belarus, Moldova and Ukraine.
Among priority transformations in the country, Khan named banking and land reforms. He also noted that in 2019, GDP growth could reach 3.5%, and after the election campaign, the bank expects the economy to accelerate by 4%.
At the same time, without reaching an agreement with the IMF, assures Khan, the economy in 2019 may decline, falling below 2%.
As for the main challenges for the Ukrainian economy, the World Bank believes they include a significant external debt and the need to service it, a drop in prices for exported goods, a delay in reform and deterioration of conditions for developing economies in foreign borrowing markets.
The bank also recalled that by year-end, Ukraine may need up to $3.7 billion to cover the state budget deficit and service its debt. If cooperation with the IMF fails to continue, 2018 state budget expenditures will have to be cut.
Large-scale privatization which never happened
A large-scale privatization could improve the situation with the state budget deficit. But over the past few years, the government has been unsuccessfully trying to fill the coffers by selling state property. In 2016, privatization proceeds amounted to slightly more than 1% of the target UAH 17 billion. In 2017, the treasury received almost UAH 3.4 billion from the same UAH 17 billion target.
For 2018, there were even greater hopes. The government has pledged UAH 21.3 billion in privatization proceeds to the state budget. At the same time, as stated by the acting head of the State Property Fund, Vitaly Trubarov, the sale of almost all large-scale privatization objects will take place only next year rather than before year-end, as was planned previously.
"We can already state the fact the privatization process for those large-scale privatization objects we have outlined is being postponed for 2019," Trubarov said. However, according to the official, this year, most likely, it will be possible to sell the energy generating company Centrenergo, in respect of which the Cabinet of Ministers earlier approved the terms of sale and the starting price of UAH 5.98 billion.
The competition for the privatization of the state-owned shares in the company is set to be held in late November or early December this year. However, Trubarov believes that the company is a bit overpriced, since the starting price fails to take into account a number of factors. “We do not expect any big figures, as there were with Kryvorizhstal. Taking into account the fact that the price, according to advisers, is marginal in terms of the very fact of sale, it is possible to have the price increased a little,” he said, noting that when determining the starting price, the adviser took into account the old law on privatization of state assets, therefore, while failing to take note of a number of factors – for example, environmental risks and the proximity to the zone of hostilities.
“The very enterprise is quite investment-attractive from the point of view of resources, but still, the enterprise belongs to the so-called dirty energy group, while most European and global companies in the energy sector are already moving away from dirty energy. Therefore, there is no doubt that there is a list of potential investors who are willing to come to our country and work in this direction, but today we are not seeing much excitement,” explained Trubarov.
As the saying goes, “you can't sell an elephant with such attitude,” but maybe the thing is that the buyer is already determined and no extra competition is actually needed.
Traditional 100% readiness for winter
It is almost always that the winter season catches Ukrainian officials off guard. Just as traditionally, the authorities on the eve of the heating season declare 100% readiness to confront the cold snap. “In general, 99.8% of all [heating] facilities across the country are ready ... From a technical point of view, the country is ready for the heating season of 2018/2019,” Eduard Kruhliak, Deputy Minister of Regional Development, Construction and Housing and Utilities, said cheerfully.
Each municipality is free to choose the date of launching the heating season. Therefore, the Deputy Prime Minister - Minister of Regional Development, Construction and Housing and Utilities, Hennady Zubko, stressed that the heads of regional state administrations should take under their personal control the start of the heating season on the ground, and in case of sabotage by local authorities, they have every right to contact the prosecutor's office as a maximum amount of funds had been transferred to the regions as part of the decentralization process that started back in 2015.
According to the State Treasury, local authorities hold back in their deposits in banks some UAH 15 bln, which testifies to their inability or unwillingness to invest in the development of their own regions.
Zubko recalled that the government had instructed the National Joint Stock Company Naftogaz of Ukraine to conclude by October 15 contracts for gas supplies with heat and hot water producers. Naftogaz has also been instructed to conclude contracts with heat supply and heat generating enterprises on the restructuring of debts for consumed gas.
According to Zubko, there are already problems seen with the preparation for the heating season in Kotsyubinsky (Kyiv region), Smila (Cherkasy region), and Shepetivka (Khmelnitsky region).
Also, there some uncertainty remains in Kyiv. In the outgoing week, representatives of Naftogaz and the city authorities confirmed that the parties could settle on Oct 10 on the issue of gas supplies to the city, which would allow resuming hot water supplies within a few days and starting the heating season on time.
“Thanks to the decisions made by the government [on allocating funds for a utility company to cover the gap in tariffs], there is a significant positive shift. But, as everyone knows, a trial is underway and the court must make a final decision, that is, approve the settlement agreement we are working on. The court hearing is scheduled for October 10,” said Serhiy Pereloma, First Deputy Chairman of the Board of Naftogaz. He also noted that preliminary agreements had been reached between the parties and that they were realistic enough to be implemented.
Fear our tanks
One of the important economic news of the outgoing week was the appointment by the government of members to the supervisory board of Ukraine's united energy grid operator, Ukrenergo, which included three representatives from the state and four independent members.
In addition to the heads of foreign energy companies and experts, Sevki Acuner, the former chief of the EBRD office in Ukraine, who is also the head of the Ukrzaliznytsia supervisory board, is appointed an independent member of the supervisory board.
From the state, the Supervisory Board included: Oleksandr Poplavsky - Advisor to Deputy Prime Minister Volodymyr Kistion, State Secretary of the Ministry of Energy and Coal Maksym Nemchynov, and Deputy State Secretary of the Cabinet of Ministers Serhiy Kushnir.
The fact that the largest state-owned enterprises continue to reform, albeit with some delays, is evidenced by the recently published report of the Ministry of Economic Development and Trade. It says 100 of Ukraine's largest SOE's in 2017 increased their net profit by 38.5%, to UAH 44.4 billion, whereas a few years ago, the public sector was only able to generate losses.
Some positive developments this week were also reported in Ukraine's defense sector. Ukroboronprom handed over to the Ukrainian Army sixteen T-80 and T-64 main battle tanks restored at the Kharkiv Armored Plant, as well as five new-generation BTR-4s armored personnel carriers manufactured by the Morozov Kharkiv Engineering Bureau.
"During the transfer of equipment, the BTR-4MB1 was showcased, manufactured based on the design solutions of NATO Allies, the Oplot tank, the Verba MLRS, engines for armored vehicles, the BTR-4 experimental hull, other weapons and military equipment. In addition, the operational-tactical missile system Sapsan, in the development of which the concern's enterprises took part, was showcased," Ukroboronprom reported.
According to the press service of the Secretary of the National Security and Defense Council of Ukraine, Oleksandr Turchynov, new design solutions were introduced in the process of deep modernization and re-equipment of the T-80 and T-64BV tanks.
“An automatic fire control system with a laser range finder, a ballistic computing set and a guided weapons complex has been designed and installed, also allowing firing guided missiles,” the report said.