Week's balance: Cabinet announces reform at Ukroboronprom, economy ministry releases macroeconomic outlook, while hryvnia beefs up

The Cabinet of Ministers has announced the reform at the Ukroboronprom defense giant and put 200 state-owned companies up for sale, the economy ministry has published an updated macro forecast for the next three years, while the Ukrainian hryvnia has slightly strengthened – these are the key economic developments of the outgoing week.

The Ministry for Development of Economy, Trade, and Agriculture in the outgoing week published an updated forecast of economic and social development for 2021-2023. The ministry expects, by the baseline scenario, the recovery of a growth trend following significant losses incurred by the COVID-19 pandemic, and predicts GDP growth at 4.6 % in 2021, 4.3 % in 2022, and 4. 7% in 2023.

The consumer price index (December to December) is expected to stand at 107.3 % in 2021, 106.2 % in 2022, and 105.3 % in 2023. The ministry also predicts an increase in real average monthly wages by 12.1% in 2021, 6% in 2022, and 5.1% in 2023. At the same time, unemployment rate in 2021 will be at 9.2%, in 2022 it will decrease to 8.5%, and in 2023 – to 8%.

Forecast macro-indicators will become the basis in drafting the state budget for 2021. At the same time, the ministry recognizes that the forecast will be implemented if coronavirus spread is quickly overcome.

At the same time, only 10 % of experts interviewed by the Ministry of Economy consider unlikely the risk of subsequent pandemic waves globally.

An alternative crisis scenario for the development of the Ukrainian economy is based on the assumptions of more COVID-19 waves to come, additional quarantine measures, as well as a protracted recession in the world economy.

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"As a result, at the end of 2023 it will not be possible to reach the pre-pandemic level of development ... By this scenario, GDP is set to fall to 4-5% in 2021, followed by moderate growth for 2022-2023 at 1.8% annually," says the forecast.

Last week the State Statistics Service reported that consumer inflation in Ukraine in July 2020 in annual terms amounted to 2.4%, as it did in June. Against the previous month, consumer prices in July decreased by 0.6%, and since year-start – increased by 1.4%.

Another reform at Ukroboronprom

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Last week, Vice Prime Minister, Minister for Strategic Industries Oleh Urusky announced the government's plans to transform the state -owned defense giant Ukroboronprom. The reform will start off with top management reshuffles.

"In the form the concern exists today, it won't anymore. The management will also change. As far as I know, in the near future there should be a change in the leadership of the Concern and the entire team who have been working there for the last year," Urusky said.

Such statement puts forward questions as to whether the authorities have a clear plan for the company's development. After all, Aivaras Abromavicius, who was appointed CEO on August 30, 2019, said that he initially took up the position in order to start a financial and forensic audit aimed at detecting fraud, develop strategic documents, and bring in a new team.

"For 11 months, we have brought in almost 70 professionals to the 260-strong team. That is, all deputies of the director general are completely new people, and also almost 30 heads of the largest enterprises have been replaced. Now I've been in this position for 11 months, and this is three or four times longer than I'd planned, longer than it was laid down in personal agreements with the president," Abromavicius noted in late July.

At the same time, Abromavicius said the new team would continue its work, and he himself could resign and take a seat on the supervisory board.

Now we're hearing the government's plans to change all management, the entire team.

It remains unclear when the new management will be hired and Ukroboronprom will be reformed. The only thing that is clear is that the Concern will eventually perform completely different functions.

Ukroboronprom will turn into a state holding. It will be a managing company with functions differing from those it performs today, with minimum interference in commercial operations of holdings that will be part of the company," Urusky said.

Expanding privatization

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Last week the Cabinet of Ministers transferred 200 state-owned facilities to the State Property Fund for further privatization. In particular, it's SOEs and facilities subordinate to the Ministry of Economy, the National Academy of Sciences, the State Reserve, the Ministry of Defense, the State Food and Consumer Service, and other agencies.

It is worth noting that during a government meeting, Minister Ihor Petrashko proposed transferring 211 SOEs, but other ministers had reservations to list of objects. In particular, at the suggestion of Minister for Strategic Industries Oleh Urusky, 19 companies were taken off the list "for the purpose of additional feasibility study". Also, Acting Minister of Energy Olha Buslavets noted that the inclusion in the list of coal mining enterprises contradicts the law on the specifics of their privatization. On her initiative, Lvivvuhillia, Nadiia Mine, Lysychanskvuhillia, and Ukrenergotrud were excluded from the list.

Meanwhile, head of the State Property Fund Dmytro Sennichenko is not satisfied with the privatization process. Earlier, he complained that the Cabinet over the past five months had failed to agree on a list of SOEs of small-scale privatization.

"The next portion of objects to be transferred to the Fund is going through the eleventh circle and in five months of discussions, the list has been reduced from 360 to 253," Sennichenko noted.

Future of alcohol production

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Last week, the Cabinet approved a program for reforming the alcohol industry for 2020-2023.

The resolution provides for enhancing the state policy for the industry's development, fighting the shadow market that has taken up a 50% share in Ukraine, forming conditions for a competitive market, and the like.

It is expected that the implementation of the program will increase the volume of both production and sales of: edible ethyl alcohol – by 20 %, ethyl alcohol denatured for technical needs – by 20 %, bioethanol – by 10 %, distillates and alcoholic beverages – by 15 %.

It is also expected to reduce the shadow alcohol market and create 500 jobs.

These steps should attract investment in modernization of the alcohol industry and help increase export potential.

Also, the Cabinet approved the investment plan of the state-owned enterprise operating in the electricity market, "Guaranteed Buyer", for 2020-2022. In particular, it is planned to purchase software for forecasting generation and volume of electricity supply at the feed-in tariff, to create a website and a communication system.

Another important government decision was to redistribute UAH 1.1 billion of state subsidies for reconstruction of social infrastructure facilities.

"The program is focused, first of all, on the regions that received the largest number of IDPs, so the funds will mostly be directed to the local budgets of Luhansk, Donetsk, Kharkiv, Dnipropetrovsk, and other regions," said Prime Minister Denys Shmyhal.

Hryvnia strengthening

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In the outgoing week, the national currency hryvnia has pleased Ukrainians with a slow but steady beef-up. Since Monday, August 10, the currency has strengthened by 28 kopiykas. As of Friday, the National Bank set the official exchange rate to the dollar at UAH 27.41. Hryvnia quotes to the euro on Friday were set at UAH 32.42 as hryvnia strengthened by 26 kopiykas to Monday.

The positive trend gives reason to believe in the stability of the national currency. This is the opinion voiced by Minister of Finance Serhiy Marchenko, who said that now there are no prerequisites for the rate to weaken to UAH 30 to the dollar.

"I don't see any prerequisites for reaching the UAH 30 to the dollar rate. And I don't see any tools which anyone could use to influence the rate shift in that direction," he said. According to the minister, due to quarantine, the volume of imports decreased by 18%, while exports fell by only 6%.

"This actually normalized the balance of payments. The outflow of foreign currency from the country has decreased, which reduces the pressure on the foreign exchange market," the minister stressed.

According to Marchenko, the country is facing the prospect of economic recovery, as evidenced by rising retail trade, which means rising consumer demand.

Next week promises to be full of economic news. On Wednesday, the Cabinet plans to consider a nomination for the post of Ukrzaliznytsia railway operator CEO, a concession agreement for the Olivia port will be signed, while farmers will continue harvesting crops, including watermelon whose volume promises to exceed that of 2019.

Oleksandr Kunytsky

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