Starting from the second half of 2012, as indicated in the SACE focus, the decline in exports and investments, both public and private, has led Ukraine into a recession, weighed on by the attempt to contain the budget deficit and the negative prospects for future growth. This decline in exports (-4% in the first six months of 2013) is linked to the drop in demand from the main target markets, in particular with regard to the CIS and Asian countries (respectively 35% and 25% of Ukrainian exports, in particular steel, chemical products and agro-food). In turn, the growing imports of energy goods from Russia (25% of total imports) substantially contribute to the current account deficit, equal to 7% of GDP in 2012. In this context, the persistence of the weakness of Ukrainian exports and the failure to reach an agreement with Russia for the reduction of gas supply prices these are the elements underlying the forecasts of a further widening of the current deficit, expected this year to -7,9% of GDP. This deficit of current account has gradually drained the hard currency reserves of the Central Bank, due to the maintaining the peg of the currency to the dollar. International reserves in 2012 amounted to about $24 billion, down 20% from the previous year. Despite some measures adopted by the Central Bank to reduce the outflow of hard currency, the trend continued during the first half of 2013, a period in which reserves were also affected by the payment of a part of the foreign debt falling due, falling to 22,8 .XNUMX billion
The situation does not improve if you look at the growing public budget deficit (-4% in 2012 and expected -5% in 2013), linked on the one hand to the reduction in tax revenues due to the slowdown in the product, while on the other hand to the progressive increase in current expenditure for public wages, pensions and subsidies on the consumer price of gas, through transfers to the state-owned Naftogaz which in 2012 recorded a deficit of around 2% of GDP. The level of public debt has grown by around 15% in the last five years, thus reaching around 35% of domestic product. To deal with the situation the government maintains a high reliance on hard currency borrowing (in 2012 about half of the public debt was denominated in foreign currency) mainly through Eurobond issues. In the first half of 2013, the country managed a first bond issue for 1 billion in February and one for 1,2 billion in April, both with a 10-year maturity. The response of the markets to the issues expected in the second half of the year will then be essential for the refinancing of debt securities maturing in 2013 (equal to around 10 billion). However, reliance on the financial markets exposes the country to the risk of a deterioration in investor appetite, given thefurther borrowing envisaged by the government for the payment of the securities in addition to the use of international reserves. With the further concern of a scenario in which, until two years ago, it was Cyprus that stood out among the main investor countries in Ukraine.
In turn, the exchange rate volatility it is a further element of risk for the country. Formally, Ukraine has a free-floating exchange rate, although the Central Bank keeps the national currency pegged to the dollar at a rate of around 8 UAH/USD, entailing a significant cost for the country in terms of foreign exchange reserves. And this will hardly be sustainable in the short term. The impact of a devaluation of the Hrvnya on the external position (the country has a trade deficit equal to 11% of GDP and an external debt equal to 67% of GDP) would be substantial, therefore the monetary authorities have so far delayed a corrective action in this sense, which however could be probable in the second half of 2013.
Here then are the choices of Political Economics of the next six months will be fundamental, also for the purpose of resuming negotiations with the IMF. In addition to the necessary structural reforms to relaunch production and exports, since it is the lack of growth that fuels the debt and not vice versa, it is precisely the adoption of stabilization measures such as currency devaluation, curbing of current expenditure and deleveraging to be the main topic of discussion with the IMF, with which the country has suspended cooperation since 2011 due to the failure to adopt the aforementioned measures. A sore point for the current ruling class and their own position benefits, given the obvious unpopularity of such measures in view of the 2015 elections. Unless it is the weight of the recession itself that hits the population even more heavily, with extremely "unpopular" consequences.
