Ukraine Annual Review 2020: a contraction that tested the 2015 repairs
A pandemic contraction, a capital flow reversal and an institutional dispute — and a financial system that absorbed all three without becoming part of the problem.
The year in one paragraph
Ukraine contracted on pandemic restrictions, saw the portfolio capital that had strengthened its currency reverse within weeks, adopted a land market law in March that had been blocked for two decades, legislated in May to make the 2015–2016 banking clean-up irreversible, agreed a new IMF programme in June, and closed the year with an institutional dispute over the asset declaration system that interrupted programme financing.
The four quarters
Q1 — pandemic restrictions; capital reversal; land market law adopted.
Q2 — banking law protects the resolution framework; new IMF programme.
Q3 — recovery; the pandemic's sectoral sorting becomes clear.
Q4 — constitutional decision on asset declarations; programme financing interrupted.
What the year tested
2020 is the first real test of the institutional repairs made in 2015 and 2016, and they held.
A sudden capital outflow, a sharp output contraction and a currency movement occurred together. In 2008 that combination produced a banking crisis, a wave of household defaults and a systemic event. In 2020 it produced a manageable adjustment.
The difference was entirely structural: a floating exchange rate that absorbed the movement rather than being defended, restricted foreign-currency lending to households so that the currency move did not impair household balance sheets, and a banking sector that had been examined and recapitalised.
None of that was visible in 2020's headline figures, which showed a contraction. It was visible in what did not happen.
The land market law
The year's most consequential legislation, though its effects began the following year.
Two decades of moratorium had meant Ukrainian agricultural land could not be sold, mortgaged or used as collateral. Removing that changes the financing structure of the largest export sector in the economy.
What carried into 2021
A recovering economy, rising global energy and commodity prices, a land market due to open in July, an interrupted IMF programme, and an institutional question about constitutional authority that had been managed rather than resolved.
The commercial reading
The transferable finding of 2020 is that the value of a financial reform is measured in the crisis after it, not in the year it is made.
The banking clean-up of 2015–2016 was expensive, unpopular and did nothing visible for the four years that followed. Its return was collected in a single quarter in 2020, and again on a far larger scale two years later.
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