Reaching a majority by the pro-presidential Servant of the People Party in the Verkhovna Rada, Ukraine’s parliament, or creation by it of an ideological coalition will let it quickly form a government, negotiate a new program with the International Monetary Fund (IMF) and unlock deep reforms in Ukraine, which will facilitate economic growth. Such a base-case scenario of the possible election results was described by analysts of Bank of America MerrillLynch (BoAML).
“Key political party programs suggest that the next Rada will be open to deep reforms, which were not feasible previously,” they say I an outlook published last week pending the snap parliamentary elections in Ukraine, scheduled for July 21.
Among such reforms, the analysts point to the launch of a land market with the effect of accelerating GDP growth (which is now potentially estimated at 3%) by at least 1 percentage point (pp) and an additional $1-2 billion in investment annually, as well as switching to exit capital tax, which can add to the growth of another 1 pp.
The BoAML believes that an agreement on a new program with the IMF for four years in the amount of $8-9 billion could be reached in October-November. The lack of a program remains a key risk, but in the face of large external payments in the coming years, it will be difficult for Ukraine to cope with them without cooperating with the Fund, the outlook says. In the case of a successful new program with the IMF by the end of Volodymyr Zelensky’s presidential term, Ukraine’s international reserves could increase to $25 billion, the analysts say.
According to them, the growth of Ukraine’s economy in 2019 could reach 3.2%, which will allow investors in 2021 to receive the first, albeit small, payments on the so-called GDP warrants (value recovery instruments), and this will become an important trigger for the purchase of such securities. The BoAML estimates their fair value at around 86% of the nominal value based on conservative growth and volatility assumptions, whereas recently they are quoted slightly above 70%.
As for Ukraine’s eurobonds, the analysts retain an ‘overweight’ recommendation on them: despite a significant increase in prices that has already occurred since the beginning of this year, they still have the potential to a further cuts in rates. The authors of the outlook also point to a continuing high interest in the government bonds market, where the rates on six-month government bonds are at about 17.5% with a projected average annual inflation of 8% and an expected decrease to 6% next year.
According to the outlook, the National Bank may lower its key refinancing rate this year to 16% per annum and further to 14% per annum next year with the average annual hryvnia exchange rate of about UAH 27 per U.S. dollar this year and UAH 27.5 per U.S. dollar next year.
BoAML analysts say that in 2019-2020, Ukraine will be able to achieve the upgrading of its credit rating from ‘B-‘ to ‘B+.’ In future, its securities could be traded somewhere at the level of Egyptian securities. “We think Ukraine could trade much tighter to Egypt in time, although a long-term commitment to an IMF programme and reforms would be required first,” they said.
