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You're reading: Red lights are flashing for the hryvnia

*    Recession – the economy pushed into
recession in mid-2012, and has remained there, with real gross domestic product
(GDP) declining by around 1.2 percent year-on-year (YOY) in the first half of 2013.
The above reflects weak demand in key export markets (particularly metals) and
partially also the impact of the tight monetary policies run in late-2011/2012
to maintain the hard/fixed hryvnia policy. Since then Ukraine has been
embroiled in a mini trade war with Russia which is likely to have disrupted
trade flows, and also likely served to further depress sentiment and economic
activity. Government officials have suggested that real GDP growth will return
in 2013, and rise to 3 percent YOY in 2014, just ahead of presidential
elections due in March 2015. These forecasts appear highly optimistic.

*    Weak state of public finances – recession
and deflation has taken its toll on budget revenues, while spending has been
elevated by an administration eager to shore up its weak poll ratings. The
budget deficit thus rose to reach Hr 30.3 billion as of July, the widest
deficit for the first seven months of the year on record, with revenues up by
1.8 percent YOY, and spending higher by 9.6 percent YOY. The budget deficit
hence looks on track to exceed the Hr 50 billion full year target, and is
likely to take the consolidated/quasi fiscal deficit up to 5.5-6 percent of
GDP. Note that the Treasury runs an extremely tight cash management regime,
with the single Treasury account having just Hr 2.3bn (less than $300 million)
in funds as of September 1, i.e. only a few weeks of expenditure coverage. The
administration has more recently met ends meet by building arrears, and the
introduction of a new promissory note program. This “hand to mouth” budget
regime is highly disruptive to economic activity, and accentuates the cycle of

*    The current account is running a
significant deficit – estimated at around 7-8 percent of GDP this year. Earlier
this year the government managed to reduce demand for foreign exchange by
stalling purchases of key energy imports. However, as winter is approaching the
administration now has little choice but to resume these purchases, which will
increase pressure on the hryvnia.

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