You're reading: Economic impact mixed after Ukraine backtracks on EU deal

Ukraine might only be able to gain a short-term respite for its ailing economy, following the government’s abrupt withdrawal on Nov. 21 from a far-reaching political and free trade pact with the European Union, according to Fitch Ratings.

Already in a recession as consumption and imports have
outpaced investments and exports, Ukraine’s state debt will exceed 40 percent
of gross domestic product by the end of 2013, Fitch said. The nation’s debt
ratio could reach 48 percent of GDP by the end of next year.

“The debt ratio to GDP is expected to grow due to the
fiscal deficit, weak growth and the devaluation of the hryvnia,” reads
the international rating agency’s report
.

The three major credit rating agencies of Moody’s, S&P
and Fitch have all kept Ukraine’s credit worthiness in “junk” bond territory.

Next year, according to Fitch, Ukraine will have to repay
$8.2 billion in foreign state debt, including repayments on Naftogaz’s debts
secured by the state and money owed to the International Monetary Fund.

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Foreign currency reserves at the central bank fell to $20.6
billion in October, the rating agency added, which is not enough to cover three
months of imports.

Fitch noted that the association agreement with the EU, if
fully implemented, “would strengthen Ukraine’s credit profile…But the retreat
may also reduce the more immediate risk of Russian economic retaliation, which
has already affected Ukraine’s exports in 2013.”

Some 25 percent of Ukraine’s exports go to Russia – most of
the nation’s higher value-added goods – with an additional 5 percent going to
other Commonwealth of Independent States’ countries. Another 30 percent gets
exported to Europe, and the remainder to the Middle East, Africa, Asia and the Americas.

“However, by not signing the EU deal, Ukraine probably
avoids additional Russian pressure on its exports and its current account
deficit …Russia’s share of Ukraine’s exports dipped in the first nine months of
2013, as a result of trade disputes. Last year, goods exported to Russia were
worth $17.6 billion, slightly exceeding exports to the whole of Europe, which
were worth $17.4billion (including exports to non-EU member states),” stated
Fitch.

However, following President Viktor Yanukovych’s address to
the nation on Nov. 25, in which he stated that Ukraine faces tough economic
times whichever way it turns – implying towards a Customs Union with Russia or
the association agreement – he signaled his administration’s reluctance to
change economic policy-making.

“His (Yanukovych) administration’s ability to maintain the
status quo is unsustainable as it requires financial assistance,” said
Investment Capital Ukraine in a note.

“It
is going to be tough for Ukraine’s government to raise money from the Eurobond
market, I would say impossible because bond investors would judge the move as
official Kyiv’s denial to adapt to ever-changing macroeconomic and monetary
environment, which is taking place globally,” said Alexander Valchyshen, head
of research at ICU.

 

Valchyshen said that Ukraine could expect short-term
assistance from Russia but “this help would create a false impression for Kyiv that
it is able to drag its feet.

“And because this impression would be false
and short-lived, then, when it expires, official Kyiv (like an addict) would
again go around begging for help, however, under much more worse conditions.”

The analyst said Ukraine must drastically
change fiscal and monetary policy to cut its twin deficits and revive economic
growth to bolster its credit rating.

In 2011, the IMF suspended a credit line worth $15
billion because Ukraine reneged on promises to raise gas prices on households,
which are heavily subsidized. The IMF still maintains the condition, among
other fiscal demands to provide a new loan reportedly worth $10-$15 billion.

Kyiv
Post editor Mark Rachkevych can be reached at [email protected].