Analysts from Morgan Stanley have maintained an estimate of Ukraine’s GDP growth in 2021 at 3.4%, and 4.2% in 2022, according to the forecast materials available to the Interfax-Ukraine agency.
According to the forecast, inflation in Ukraine will decrease to 9.5% by the end of 2021 and to 5.7% by the end of 2022.
Morgan Stanley experts also forecast a current account deficit of 0.5% of GDP in 2021 and 2.5% in 2022.
They expect that the International Monetary Fund’s Stand-By Arrangement is likely to be extended by six months – until the end of June 2022.
Analysts at Morgan Stanley suggest using the recent drop in the value of Ukraine’s Value Recovery Instruments (VRI, quotes as of Tuesday evening totaled 102.4%), especially if the price drops below 100%, to buy these instruments, since their fair value is significantly higher and is about 145%, according to the bank’s report issued on April 19.
Its authors said that the second quarter of this year will bring the first payment on these securities and may show double-digit economic growth rates.
According to the analysts at Morgan Stanley, depending on the results of economic growth in 2021 and 2022, there is a significant, up to 30 percentage points, growth potential for the price of VRI in Ukraine.
According to the report, Ukrainian eurobonds have also become more attractive in recent weeks, although geopolitical uncertainty does not yet allow taking a clear position on them and such a situation, as the history of recent years shows, may continue, and spreads may even double. According to the analysts, from the entire spectrum of Ukraine’s eurobonds, dollar-denominated securities with maturity in September 2024 and 2025 look preferable, as well as in euros with maturity in 2026 due to the increased spread compared to dollar-denominated bonds.
The analysts add that government domestic loan bonds now do not look as attractive as eurobonds, their real profitability is not high, and one should expect their cheaper valuation.
Last week, in its lending strategy for Ukraine, Morgan Stanley, explaining its cautious stance on the country’s eurobonds, also pointed to the slow progress of reforms and the delay in the IMF tranche, COVID-19, as well as overall risks in emerging markets. At the same time, the analysts noted better-than-expected results for 2020 and a favorable macroeconomic background for 2021 with a slight current account deficit. In their opinion, Ukraine will receive one tranche from the IMF this year – at the beginning of the second half of the year, but there is a risk of a worsening of the situation, which could lead to the fact that both sides will eventually turn to a new program late 2021 or early 2022.
VRI were issued as part of the restructuring of the state debt of Ukraine in 2015 instead of eurobonds for a nominal amount of $3.2 billion (20% of the restructuring volume) and are not part of the country’s public debt. Payments under VRI will be made annually in monetary form in U.S. dollars, depending on the dynamics of real GDP growth in Ukraine in 2019-2038, but in two calendar years – that is, between 2021 and 2040.
If GDP growth for the year is below 3% or real GDP is less than $125.4 billion, then there will be no payments on securities. If the growth of real GDP is from 3% to 4%, the payment on securities will be 15% of the excess of the GDP indicator over 3%, and if it is above 4%, then another 40% of the excess of the GDP indicator over 4%. In addition, from 2021 to 2025, payments are capped at 1% of GDP. The absence of any restrictions on payments after 2025 in the case of rapid GDP growth has been criticized by individual politicians and experts within the country.
Ukraine in the middle of August 2020 announced the completion of the buyout of about 11% of its VRI on the open market to reduce payments on them in the future. Roughly payments on VRI in 2021 before their partial redemption are estimated at $40 million, funds for them have already been provided in the state budget.
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.
