Week’s balance: Hryvnia calms down as Ukraine counts days to securing IMF tranche
The International Monetary Fund has promised in the coming days to agree on the details of the decision on the allocation for Ukraine of a new tranche of the loan; the hryvnia seems to be calming down following the stormy days at year-start; and the government has brought to top agenda the issue of pension reform – these are the key economic news of the outgoing week.
The week’s main economic newsmaker was IMF Managing Director Christine Lagarde who talked of the imminent completion of the third revision of the Fund’s cooperation program with Ukraine, based on which Kyiv can receive the next tranche worth about $1 billion and maintain macroeconomic stability achieved earlier. "I have every reason to believe that the last few technical details that need to be addressed in the next couple of days will be satisfactorily resolved. Hopefully, by that time we will have met all the requirements," the IMF Managing Director said, according to the Ukrainian president's press service. commenting on the outcome of her talks with President Poroshenko at the World Economic Forum in Davos, Switzerland.
In turn, Poroshenko expressed content with Ukraine fulfilling and meeting all the requirements of the third IMF Memorandum.
"I am proud that in such a difficult time of economic and financial stabilization we have a remarkable cooperation with the entire IMF team and achieve promising results," Poroshenko said, noting that the “is a co-sponsor of a significant part of our reforms and our success.”
The Fund’s mission completed its work in November 2016, but the Executive Board did not meet before the end of 2016 to hear the mission’s report, despite the fact that Ukraine had fulfilled all the recommendations, including the adoption of the state budget for 2017 with a deficit not exceeding 3% of GDP, and the nationalization of the country’s largest bank, PrivatBank.
Among other important news from Davos there was Petro Poroshenko’s statement on possible expansion of cooperation with China and the agreement with the Swiss government on joint investigation of the crimes of the Yanukovych regime, as well as a $100,000 financial assistance.
Forum in Davos was preceded by a farewell visit to Kyiv by U.S. Vice President at the time Joseph Biden, who has now stepped down giving way to the team of the next U.S. President, Donald Trump.
During a meeting with Ukrainian President Biden he expressed hope that the US will remain Ukraine’s partner and continue supporting it. Having praised Ukraine for strengthening the banking sector, he noted that it is too early to stop and it is important to fulfill the requirements of the International Monetary Fund, simultaneously reducing dependence on Russian gas, and getting rid of corruption. Biden also urged the international community to maintain unity in the struggle against Russian aggression and not to lift sanctions against Russia for the occupation of Crimea until Russia returns the peninsula to Ukraine.
Poroshenko thanked Biden for the support and expressed readiness to continue fruitful cooperation with the new U.S. leadership.
In turn, Prime Minister Vladimir Groysman promised the U.S. official not to stop on the way of reforms that "will bring peace, stability and calm to our country", focusing on judicial reform, large-scale privatization, transformation of the energy sector and the banking system, and the reform of the Pension Fund .
Row over pensions
One of the conditions for the successful continuation of cooperation with the IMF and the preservation of the fragile stability of public finances is the introduction of pension reform. This week, having opened a veal of secrecy around the essence of the reform, the Ukrainian government, has totally confused the Ukrainians.
The Ministry of Social Policy on Monday morning (Jan 16) reported that during the meeting with the permanent representative of the IMF Jerome Vacher, Minister Andriy Reva had announced certain pension innovations, which, according to him, would be a real "shock" for the citizens. Among the elements of this shock therapy, he named a unified approach to the calculation of pensions, reduction of pensionable service from 20 years to 15 years, the opportunity to buy off one’s insurance period, and the ban on employment for those who get pensions, as well as the abolition of all kinds of pension bonuses.
Reva also said that the law could be enforced as early as in July this year. At the same time, there came reports in some media outlets that that the updated pension system involves raising the retirement age to 63 years, as allegedly required by the new IMF memo.
Soon the ministry annulled the press release with Reva’s statement, and Deputy Prime Minister Pavlo Rozenko hastened to assure that there are no fixed commitments to raise the retirement age in Ukraine.
Rozenko made it clear that the government has no unified vision for the future of the country’s pension system yet. Concerned experts have confirmed that the authorities had not discussed with them a plan to reform the pension system.
"We don’t yet see a dialogue with the economic experts and the public, and no one knows anything of a new bill," general manager of the "Pension Reform" group of a social platform "Resuscitation reform package" Halyna Tretyakova said.
According to her, the issue of pension reform has long become urgent, because so far nothing has been done in this direction, while the new IMF memo includes a commitment to reduce the deficit of the Pension Fund.
The project of the pension reform was not presented to the public this week. At the meeting on Wednesday, January 18, the Cabinet of Ministers approved the Pension Fund budget for 2017 with a UAH 284 billion revenue and budgetary subsidies to cover a UAH 141 billion deficit. The government expects to cover the growing deficit with the growth of revenue from the single social contribution due to the increase in the minimum wage. However, so far the experts find it difficult to assess the volume and the likelihood of the increase in these revenues in the future.
London High Court
While part of the Ukrainian elite was in Davos and the other was debating on the subject of pension reform, the High Court in London held three-day hearings of the Russian claim against Ukraine over the loan of December 2013 which arose from the purchase of Eurobonds via the Irish Stock Exchange. The Russian Federation, which three years ago bribed Viktor Yanukovych for abandoning the European integration course in favor of Ukraine’s transformation into a Russian satellite, now wants to have the claim reviewed under the accelerated procedure.
The mechanism of loan attraction was commercial in its nature but due to the fact that the Russian Ministry of Finance bought the bonds in line with the agreement between Russian President Vladimir Putin and Viktor Yanukovych, Russia considers this an interstate debt. And of course, the party to this deal, Russia, does not recognize the war it unleashed against Ukraine, killing some 10,000 Ukrainians, destruction of property worth billions of dollars, the annexation of Crimea and the occupation of part of Donbas.
It should be recalled that in November 2015, Ukraine has successfully completed the restructuring of the external debt, agreed with the holders of Eurobonds of the 13th series. All creditors have agreed with the restructuring except holders of "Russian" bonds worth $3 billion as the Russian insisted on getting better conditions than the other creditors. In this regard, in December 2015 Ukraine has introduced a moratorium on the payment of this debt, and Russia in February 2015 appealed to the High Court of London.
As explained by Dragon Capital analyst Serhiy Fursa, in the coming days, the court will determine the procedure of the lawsuit consideration, while it would be better for Ukraine if this would be a long-term procedure.
"The ideal solution possible is Ukraine having to pay Russia, but only as soon as the Russian troops withdraw from the Ukrainian territory. That’s because the Ukrainian territory is occupied as a result of the actions of Russia, which is our creditor," he said, noting that the court can go for such a decision, since there have already been such precedents when the court recognized the debt as odious.
The Ukrainian side is set to defend his position until the end.
"If the decision is negative, there is always a possibility to appeal," said Minister of Finance Oleksandr Danyliuk. The minister stressed that Ukraine has received this loan under pressure and suffered huge losses as a result of actions of the Russian Federation.
The court concluded the hearings on Thursday, January 19, as the judge promised to announce a decision “in due course”, which may take several months.
Hryvnia calms down
Tired of the unrest, traditional for any year-start, which led to a decrease in the hryvnia exchange rate against the dollar by 2.8%, the currency market comes back into balance. After quotations in the interbank foreign exchange market at UAH 27.8/27.9 / USD on Monday, January 16, the hryvnia strengthened to UAH 27.4/27.5 / USD at the end of the week. The National Bank, which earlier intervened to stabilize the exchange rate with a rather large amount of currency sales, finally took a break.
It is obvious that such turbulence in the forex market will be possible in the future, since, according to estimates of the experts surveyed by UNIAN, the hryvnia devaluation trend will continue this year, with the growth of rate fluctuations at the beginning and end of the year.
NBU Council, as planned, on Tuesday, January 17, held a meeting on the current state of the forex market and decided to appeal to the government to "reconsider the practice of fiscal expansion at the end of the year", which implies building up an offer of the hryvnia in circulation, which puts pressure on currency market. "The government should listen to our recommendations. I am convinced that their implementation will contribute to the revival of confidence in the banks, the return of deposits in the banking industry, revitalization of lending, and thus create a solid foundation for the recovery of the national economy," said Head of the NBU Council Bohdan Danylyshyn.
Commenting on the results of the storm, senior analyst at Alpari Vadym Iosub noted that fluctuations at year-start have become a tradition, while the main causes of these phenomena lay in the reduction of business activity of exporters and active utilization of public funds at the end of the year.
"But both in 2015 and 2016, the growth of the dollar at the beginning of the year gave way to its significant drop when excess hryvnia liquidity absorbed and revenues from exports started arriving more rapidly. Most likely, and this year will be no exception, and the dollar by year-end will return to the level of UAH 27. At the same time, at the end of the first quarter, it cannot be ruled out that it will drop to UAH 26," the expert said.
The coming week promises to be no less interesting. We will wait for positive news from the IMF and the Ukrainian officials who got enough of fresh air in the mountains of Davos. The State Statistics Service will release its data on industrial production output in 2016. The Ukrainian businesses will also complete their yearly financial reports soon. Stay tuned.
Olha Hordienko (UNIAN)