Ukraine’s economy will shrink by 3.5% in 2020 due to the coronavirus-related crisis, while the global economy will lose 5.2% overall, the World Bank announced this in the updated Global Economic Prospects on Tuesday. “The depth of the contraction will depend on the duration of the health crisis, progress on major pending reforms, and the ability to mobilize adequate financing to meet sizable repayment needs,” the World Bank said.
According to the bank, next year the growth of the Ukrainian economy will resume at a rate of 3%, which is lower than the expected recovery of the global economy at 4.2%.
The World Bank said that compared with the previous forecast in January of this year, it worsened expectations of the dynamics of Ukraine’s GDP this year by 7.2 percentage points (pp), and in the next – by 1.2 pp.
The World Bank has improved the forecast for Ukraine’s GDP growth in 2019 from 3.4% to 3.6%, World Bank Senior Economist Anastasia Golovach has said.
“For 2019, we do not expect any surprises and we think that Ukraine’s GDP will grow by 3.6%. A good indicator, but external risks, in some way, are increasing for Ukraine, so the structural transformation of the economy is important,” she said at a press conference in Kyiv on Tuesday.
She noted that maintaining the current rate of economic growth will require an increase in capital investment, which amounted to 10% last year. This will require a greater influx of foreign direct investment.
At the same time, the bank kept forecasts of economic growth in 2020 at 3.7% of GDP, in 2021 at 4.2%, she said.
According to the banker, the deficit of the balance of payments in Ukraine in 2019 is expected to reach 3.1% of GDP, however, due to the potential loss of gas transit revenues and the unfavorable situation in the world markets, this figure will increase in 2020 and 2021 to 3.6% and 3.8% of GDP.
“But subject to rapid reforms, we expect in the next month that Ukraine will be able to maintain the economic growth rate at 3.7% in 2020 and accelerate it to 4.2% in 2021,” Golovach explained.
“An important factor in reducing pressure on the budget deficit is control over current budget expenditures and a balanced reduction in the minimum wage this year – only at the level of 12%, which is very contrasted with the previous years,” Golovach said.
Moreover, according to her, inflation will continue the downward trend: from 9.8% at the end of last year to 6.4% by the end of this year, as well as 5.5% and 5% in 2020 and 2021 respectively.
According to the bank’s expectations, in 2019 the deficit of the national budget of Ukraine will show a decrease to 2.1% in 2020 and 1.9% in 2021.
The World Bank believes that the level of public debt of Ukraine will also continue to decline this year to 51.7% of GDP. At the same time, the bank maintained the forecast for its further growth in 2020 and in 2021 to 54.6% and 55.3% of GDP respectively.
Finance Minister of Ukraine Oksana Markarova has said that in two years Ukraine seeks to cut state debt to 40% of GDP and will strive for deficit-free budget in the future. She said on the Freedom of Speech by Savik Shuster program on the Ukraina TV Channel last week that permanent restructuring of state deb is unfavorable, as it would give the country fewer resources today than reputation losses.
“Ukraine has always been very unpredictable. We rapidly increased our debt from 2006 to 2008, then it also grew rapidly from 2013 to 2014, because it was in foreign currency, because in 2013, three billion in foreign currency was borrowed. We need to move away from this. That is, now we are again reducing debt compared with GDP, and this year it is less than 60%,” Markarova said.
The finance minister said that for 2020 the goal is to reduce public debt to 52% of GDP, and “in two years to reach even 40%.” “This will give us the opportunity of living like European countries: when they need development, they borrow money, when they do not need it, they do not borrow. Because debt in itself is not bad, it is bad when we take a debt and live on it,” she said.
Markarova said that therefore, next year the budget deficit will be only 2% of GDP, this year it is 3.2%. “That is, we will constantly try to come to a budget without deficits, and this will give us the opportunity of absolutely resolving all our debt issues and direct the money we earn to important and priority issues,” she said.
The minister also assured that the Ukrainian authorities constantly communicate with international partners, investors and gives all the information about what the country is going to do. “For the first time last year we adopted a debt strategy and now we are constantly telling how we will reduce this debt,” the finance minister said.
The World Bank, taking into account the results of H1 2019, has improved its forecast for gross domestic product (GDP) growth in Ukraine in 2019 from 2.7% to 3.4%, expecting that it would accelerate to 3.7% and 4.2% in 2020 and 2021 respectively.
“If the new government is able to deliver on its ambitious reform goals, growth can increase to 4% by 2021,” the World Bank said in its October report entitled “Migration and Brain Drain.”
The analysts said that this will require progress in the following areas: reviving sound bank lending to the enterprise sector by completing the reform of state-owned banks; attracting private investment into tradable sectors by establishing a transparent market for agricultural land, demonopolizing key sectors and strengthening antimonopoly policy and enforcement, privatizing state-owned enterprises, and tackling corruption; and safeguarding macroeconomic stability by addressing current expenditure pressures, securing adequate financing, further reducing inflation, and rebuilding international reserves.
If reforms do not progress and adequate financing is not mobilized, growth could fall below 2% as investor confidence deteriorates, macroeconomic vulnerabilities intensity, and financing difficulties force a compression in domestic demand. Ukraine will need to safeguard macroeconomic stability and manage fiscal risks.
According to the expectations of the World Bank, in 2019, the deficit of the national budget o Ukraine would be 2.2% of GDP. The figure would decrease to 2.1% of GDP in 2020 and to 1.9% of GDP in 2021.
According to the World Bank’s forecast, the public debt will also continue to decline this year to 53% of GDP, but will grow in 2020 and in 2021 to 54.6% of GDP and to 55.3% of GDP, respectively.
As indicated in the materials, the current account deficit will continue to grow: in 2019 – to 3.5% of GDP, in 2020 – to 3.8% of GDP and in 2021 – to 4.3% of GDP.
At the same time, the bank expects a slow increase in net foreign direct investment (FDI) inflows in 2019 and 2020 to 2.2% of GDP and 2.3% of GDP, respectively.
At the same time, inflation will take a downward trend: from 9.5% at the end of last year to 6.8% this year, as well as 6% and 5.4% in 2020 and 2021, respectively.
According to the report of the World Bank’s experts, the main risk for the Ukrainian economy is formidable financing needs. So, according to the analysts, it will take about $11 billion per year, or 8% of GDP, to pay off government debt and finance the budget deficit in the current and next two years.
“To raise the necessary financing, it is critical to maintain the reform momentum and fiscal discipline, while continuing cooperation with development partners,” the bank said in the report.
Ukraine’s GDP growth will reach 3.2% in 2020 with a further acceleration to 3.6% in 2021, Morgan Stanley predicts.
Since the prospect of land reform is becoming more defined, the bank is raising its forecast for the economic growth of Ukraine and the hryvnia exchange rate. Now it expects GDP growth by 3.2% in 2020 with a further acceleration to 3.6% of GDP in 2021. The bankers also forecast the hryvnia exchange rate of UAH 26.5/$1 at the end of 2019 and UAH 27.5/$1 by the end of 2020.
According to the report, Morgan Stanley also expects the first tranche from the International Monetary Fund for Ukraine before the end of this year, which could follow the adoption of the law on the national budget of Ukraine for 2020.
The Cabinet of Ministers sets a goal of raising $50 billion of investment for GDP growth of 40% in five years in the government program, Ukrainian Prime Minister Oleksiy Honcharuk has said.
“We confirm that over the next five years (and we consider this situation realistic and aiming high with this ambition) we will come to a situation when our economy will grow by 40%. To do this, we need to attract somewhere $50 billion of investment,” he said at a press briefing in Kyiv on Monday, talking about the government’s program.
As reported, the State Statistics Service in 2018 substantially revised foreign direct investment (FDI) indicators in Ukraine in the form of equity capital: if at December 31, 2017 they amounted to $39.14 billion, then at January 1, 2018 – $31.59 billion. According to the statistics, FDI growth for the first half of 2019 amounted to $0.84 billion, compared with $0.69 billion in 2018 and $0.38 billion in 2017, while before that, three years FDI were reduced – totally by $22.47 billion.
In addition, according to Honcharuk, the government sets itself the task of creating 1 million jobs.
“We must create such conditions so that it would be comfortable for people to start a business, their own business, so that foreign companies would be interested in entering the country,” the prime minister said.
The government said in the program, posted on the website of the Verkhovna Rada on Monday, that the government intends to distribute new budget revenues according to the 70/30 principle, “where 70% will be invested in economic development, 30% will be spent on social security.”
“To simplify the calculations, we proceed from the fact that 1% of inclusive economic growth gives us about UAH 15 billion of revenue to the national budget,” the government said in the document.
In the opening statement of the program, bringing of all the main roads into good condition (24,000 km), the active development of the railway and the construction of five deep-sea ports and 15 airports are listed among the main plans.
