Ukraine Market Report — Q1 2015
The currency fell sharply in February before stabilising, inflation reached its highest level since the 1990s, and a larger multi-year IMF programme replaced the one agreed a year earlier.
Overview
The hryvnia fell sharply in February before stabilising later in the quarter. Inflation accelerated to its highest level since the 1990s. A new multi-year IMF programme was approved in March, replacing the arrangement agreed the previous April.
The currency and the stabilisation
The February movement was severe and brief. Stabilisation followed through a combination of administrative controls on the currency market, the new programme's financing and, most importantly, the collapse in import demand that the recession itself produced.
The pattern is standard for a currency crisis in an economy with a large import bill. The adjustment overshoots, imports collapse because nobody can afford them, the trade balance improves for entirely negative reasons, and the currency settles at a level well below the pre-crisis rate but above the panic low.
For a company operating in Ukraine, the practical consequence of that quarter was that anything imported became a rationing problem rather than a pricing problem, and businesses dependent on imported inputs had to substitute or stop.
The new programme
The extended arrangement agreed in March was larger and longer than the 2014 stand-by, and its conditions were more demanding: bank resolution, energy tariff reform, fiscal consolidation and governance measures.
The critical difference from every previous Ukrainian programme was that these conditions were met. The reason was not improved political will in the abstract — it was that the fiscal and external position had deteriorated to the point where no alternative existed.
Macro position
Deep output contraction. Very high inflation. The banking sector in resolution.
Sectors
Agriculture — the sector holding the economy up. Export competitiveness at its highest in decades.
Metals — disrupted by the loss of eastern capacity and coal supply.
Banking — licences being withdrawn from insolvent institutions at a rapid pace.
IT services — growing strongly, with the currency making Ukrainian rates highly competitive.
Retail and imports — severe contraction.
What the quarter settled
That the reforms deferred for a decade would now be implemented, because the option of deferring them had been removed by the fiscal position rather than granted by any change of view.
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