Week's balance: Naftogaz reduces prices, hryvnia strengthens, while industrial output slides

Naftogaz of Ukraine promised in August to significantly reduce gas prices, the State Statistics Service reported a decline in industrial production in June, while the hryvnia strengthened on the outcome of parliamentary elections – these are the main economic developments of the outgoing week.

The Ukrainian president's "Servant of the People" party won a landslide victory in snap elections to the Verkhovna Rada with over 43% of popular support, securing the best result over the entire history of Ukraine's independence. The party will receive 254 seats in parliament, allowing it to a mono-majority and pass practically any laws, appoint a government, and form other agencies that are key to the economic development – all without the need for coordination with other factions.

Thus, in the next few years, the political force will enjoy the whole entirety of legislative power, which could become the basis for the fulfillment of election promises, accelerated reform, and a buildup of a competitive and democratic state.

The government will play a significant role in reform success. On the part of the president and the newly elected deputies, there are no specifics as to who will lead the Cabinet. However, the media have already voiced the names of potential candidates, including: Deputy Executive Director of the International Monetary Fund Vladyslav Rashkovan, chairman of state-owned Naftogaz of Ukraine Andriy Kobolyev, Naftogaz CCO Yuriy Vitrenko, Secretary of the National Security and Defense Council Oleksandr Danyliuk, and Chairman of the supervisory board of Ukroboronprom Aivaras Abromavicius.

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Meanwhile, president's advisor Oleh Ustenko notes that the number of candidates for the Prime Minister’s position is much larger than is now being discussed in the media.

We will see the first meeting of the new Verkhovna Rada and the formation of the new government in late August or early September.

Gas price keeps dropping

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The price of gas in Ukraine continues falling. National Joint-Stock Company Naftogaz of Ukraine announced its intention to reduce minimum prices for natural gas for industrial consumers from August 1 by 7.5% against July, to UAH 4,640 per 1,000 cubic meters. Maximum prices for industrial consumers from August 1 will be reduced by 7.2% to UAH 5,204 per 1,000 cubic meters. The government said that the price for the households in August will decrease by 5.5% and will not exceed UAH 4,640 per 1,000 cubic meters.

Moreover, Prime Minister Volodymyr Groysman said that Ukrainians during the 2019-2020 heating season should not pay more than the price set in August. The head of government explained his position by the fact that it is now that Ukraine is buying from Europe natural gas which will be used in winter. He also recalled that the price for the households over the three months decreased by 25%.

It should be noted that the government resolution of June 5 provides that Naftogaz analyzes four indicators for determining gas prices for the households: the price for commercial consumers and the average customs value of gas for the previous month, the weighted average price at the Ukrainian Energy Exchange, and the average market value gas price in the period from July to September, multiplied by the reduction factor. Naftogaz is obliged to choose the lowest among them.

Industrial output sliding

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In the outgoing week, the State Statistics Service published data on a 2.3% decline in industrial output in Ukraine in June 2019 on year after a 1.3% growth a month earlier. Compared with the previous month, industrial output in June decreased by 3.7%.

According to the State Statistics Service, the largest drop was recorded in the production of electrical equipment, in woodworking industry, textile industry, and mechanical engineering.

At the same time, the highest growth was recorded in the extraction of coal and brown coal, chemical industry, and the extraction of metal ores.

Against the background of statistics, the recent searches by the Security Service (SBU) and the National Anti-corruption Bureau (NABU) at the country's largest enterprises leave many perplexed. After all, pressure on the part of security forces on businesses does not contribute to the development of domestic industrial output.

On July 20, the SBU came with searches to the ArcelorMittal Kryvyi Rih metallurgical plant. SBU suspects the company management of causing significant harm to the Ukrainian ecology. In turn, the company management calls such charges manipulative and incorrect.

A few days later, on July 24, NABU detectives searched all enterprises of Bogdan Corporation in connection with the restructuring of an Ukreximbank loan. The company regards this as a politicized case and pressure, while NABU director Artem Sytnyk refutes political motivation. At the same time, it is important to remind that Bogdan is led by former first deputy secretary of the National Security and Defense Council Oleh Hladkovsky, who came into a spotlight during the investigation of embezzlement in Ukroboronprom defense giant.

Hryvnia keeps strengthening

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The positive trend of the outgoing week was the confident strengthening of the hryvnia against the dollar. This week, the national currency strengthened from UAH 25.69 to a dollar to UAH 25.46.

Mykhailo Rebryk, a senior analyst at Raiffeisen Bank Aval, has told UNIAN that the key factors behind this in July were the sale of foreign currency by non-residents for the purchase of domestic government bonds and the growth in foreign currency earnings of agricultural and metallurgical exporters.

"All this is happening against the background of the traditionally quiet summer period when sales prevail. World prices for grains and iron ore are high, while oil and gas are cheaper," explained the expert.

According to him, non-residents reacted positively to the results of the early parliamentary elections in Ukraine and believe in accelerating reforms, while the macro situation in the country is favorable, and the real rate on Ukrainian bonds remains one of the highest worldwide.

According to the expert, there are no fundamental reasons for hryvnia to weaken. Ukraine is about to receive another record-high grain harvest, and there are no reasons for the reduction in the non-residents' demand for government bonds. Moreover, if a technocratic prime minister is appointed and reforms accelerate, non-residents will start buying up government bonds even more intensively.

Rebryk believes that there is a possibility of the hryvnia further strengthening to the level of UAH 24.90 - UAH 25 per dollar, while devaluation is possible only against the background of bad political news.

At the same time, he noted that excessive strengthening of the hryvnia leads to non-fulfillment of budget targets for income from duties and taxes on exports/imports, as well as a negative impact on the financial performance of exporters.

It is worth adding that, according to the Ministry of Finance, the volume of public and publicly guaranteed debt of Ukraine in January-June 2019 increased by $2.03 billion, or 2.6%, to $80.35 billion. In the hryvnia equivalent, the volume of public debt over this period decreased by UAH 66.04 billion, or 3%, to UAH 2.102 trillion.

Obviously, the next few weeks will bring a lot of important and interesting news. The country will learn the names of its new ministers and deputies. It's the future future format of the Cabinet of Ministers supported by the majority of the Verkhovna Rada on which success of the reforms will depend as well as the rate of economic growth.

But regardless of how the political and economic situation in Ukraine develops, farmers will continue their harvest campaign, bringing the country closer to another national record. As of July 26, agrarians have already harvested 28 million tonnes of early grains from over seven million hectares.

Ihor Orel

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