Week's balance: NBU improves outlook, lowers key rate, finance ministry boasts of record borrowing, and customs agency receives official status
The National Bank announced improved economic development forecasts and decided to reduce the key rate, the Ministry of Finance held this year's record placement of domestic government loan bonds, while the renewed customs agency received official status and began its work – these are the key economic news of the outgoing week.
The key economic news-maker of the week ahead the snap parliamentary elections was the National Bank, which, unlike the government bodies, didn't plunge into political battles, continuing to work as usual. On Thursday, the NBU announced an updated forecast, suggesting more optimistic estimates of economic growth, the balance of payments and international reserves.
In particular, the National Bank raised the forecast of real GDP growth in 2019 to 3%, and in 2020 – to 3.2%. The key factors for the acceleration the NBU called steady domestic demand, improved terms of trade, and the expected growth of the grain harvest.
Among the restraining factors remain low activity of the global economy and the expected reduction in gas transit to Europe from 2020 due to the construction of Putin’s bypass gas pipelines.
Contrary to the decrease in revenues from transit, the balance of payments forecast has also been improved. This year, the current account deficit of the balance of payments will narrow due to a high grain harvest, lower energy prices, and a reduction in dividends to foreign investors. As a result, the balance of payments in this and next year will be seeing a surplus, while the level of reserves will be higher than expected.
In addition to optimistic forecasts, in the outgoing week, the National Bank pleased the business community with the next step toward cheaper loans. Since July 19, the regulator has reduced its key rate by 0.5%, to 17%. Thus, the National Bank resumed the monetary policy easing cycle, which started in April with a rate cut for the first time in two years, but suspended in June due to accelerated inflation after problems with the supply of petroleum products and a record price increase for vegetables.
In addition, the National Bank has made another step toward increasing the transparency of its policies, promulgating the forecast for the future behavior of the key rate. Thus, the regulator plans to gradually reduce the rate to 8% in the fourth quarter of 2021, but the actual decisions will be made taking into account the current inflation risks and the macroeconomic situation.
The Ministry of Finance praised the NBU's step, but with the proviso that they hoped for a more substantial key rate cut. Meanwhile, it is the high rate that allows the government to actively attract resources to finance the budget deficit.
In the outgoing week, the Ministry of Finance carried out the most successful placement of domestic bonds this year, receiving UAH 7.4 billion and $1 billion to the state budget, at the same time reducing the cost of raising resources for all instruments.
The total amount of funds received in hryvnia equivalent exceeded UAH 33.3 billion. "Despite the pauses in the past in cooperation with the International Monetary Fund, the dual-election year, dubious judicial decisions on illicit enrichment and many others that increase the risks and, consequently, the cost of borrowing, the Finance Ministry ups the borrowing period, reduces the cost and cuts the debt to GDP ratio," Minister of Finance Oksana Markarova said, commenting on the new borrowing.
Non-residents also continue to actively increase investments in Ukrainian bonds. The latest bidding saw the volume of bonds owned by foreign investors rising to UAH 67 billion, which is almost 11 times more than the figure recorded at year-start. Now the non-residents' share in the Ukrainian domestic bonds market has reached 9%, while financial regulators see no threat in an active inflow of "hot" capital.
“If you look at the structure of the maturity of these bonds, only a quarter falls on this year. About a third –next year. Nearly half are securities maturing in 2021 and later. That is, the repayment structure looks fairly uniform and stable," said NBU Deputy Head Dmytro Solohub. He asserted that the country should not repeat the negative experience of Argentina and Turkey, where a massive simultaneous capital outflow of non-residents provoked upheavals in the foreign exchange market.
Despite the active work of the government in the domestic market, the NBU forecasts the entry to the foreign borrowing market with the placement of eurobonds worth $ 1 billion as early as this fall. The cost of borrowing directly depends on the resumption of cooperation with the IMF, the launch of the new program, and the receipt of the first $2 billion tranche, which the National Bank expects in the fourth quarter of 2019.
New customs agency
In the outgoing week, the newly created State Customs Service of Ukraine received an official status, having been registered as a legal entity at the state register. The head of the service, Maksym Nefyodov, has already issued the first order – on hiring himself.
"I hired myself. That's my first experience. Now the new customs agency has one employee and paper blanks. It still doesn't have a seal though. And there is still no documentation office. What registration number should I put?" Nefyodov wrote on social networks with a hint of irony.
Meanwhile, now the country's top customs officer will face titanic challenges of organizing the work of the new agency in a short time. During the meeting with business CEOs, Nefyodov said he expected systemic changes in the customs sphere no earlier than in 12 months, at the same time promising the first tangible innovations to be introduced by the end of this year. He gave his word to move away from the practice of setting the targets for customs revenue that is widespread today, and also to make open customs data to reduce abuse of power by certain officials.
By the end of the year, Nefyodov says, the parliament is expected to pass a new Customs Code to replace the outdated one which includes no EU standards. He proposes to harmonize customs rates and organize data exchange with customs offices of the neighboring countries.
Start of competitions for the selection of new employees is expected to be held in September - October, while the team will have been formed by the end of the year. Nefyodov promises to initiate an increase in the salaries of customs officers, but plans to optimize the staff, primarily by cutting the administration.
In the meantime, the government dismissed from office acting head of the State Fiscal Service (the agency in the process of liquidation), Oleksandr Vlasov after he filed a resignation letter. According to Prime Minister Vladimir Groysman, now the liquidation of the fiscal service will be headed by "one of the directors of the SFS departments, who is now on a business trip."
Next week promises to be no less interesting. The outcome of a key political intrigue is expected – who will gain control over the country's new legislative body and the right to form the government of reform and radical changes. In addition, the State Statistics Service will publish data on the dynamics of industrial output for the first half of the year.