As Europe Struggles, Ukraine’s Economy Heads for an Upswing – Bloomberg

As economic growth falls across Europe, Ukraine may be embarking on an upswing.

Data this week showed expansion in the former Soviet republic surged last quarter, even as U.S.-China trade tensions and a wider global slowdown weighed on most of the continents.

The pace — 4.6% — was unexpectedly quick. The World Bank had warned that if growth didn’t top the rate of recent years it would take half a century to bring income up to the levels of neighboring Poland, which has thrived since joining the European Union.

President Volodymyr Zelenskiy, who won control of parliament last month, has set his sights on expansion of 5% or more in the coming years. A reform plan is fueling optimism among investors and has made the hryvnia this year’s best-performing currency.

“The initial signs are encouraging,” said Viktor Szabo, investment director at Aberdeen Asset Management PLC in London, who helps oversee $14 billion in emerging-market debt.

Aberdeen has an overweight position in Ukrainian bonds and Szabo rues the company’s early disposal of warrants linked to economic growth issued after a 2015 government debt restructuring.

He expects a “bold” program with the International Monetary Fund to be agreed on once a new government is in place next month, though says an overhaul of the country’s murky court system is vital to the new president’s success.

Ukraine's economy has underperformed neighboring Poland's for years

Ukraine’s economy has had a rocky ride since 2014 when protesters ousted Kremlin-backed Viktor Yanukovych and Russia seized Crimea before fomenting war on the two nations’ border.

With the pro-EU administration that followed not tough enough on corruption, the rebound from recession was meager. That paved the way for Zelenskiy, a former TV comic, and political novice, to take power.

His plans highlight where the previous government fell short: judicial reform, privatization and loosening rules on owning farmland. Meanwhile, inflation has eased, allowing the central bank to trim eastern Europe’s highest benchmark interest rate.

That boosted consumer confidence, which “improved significantly following Zelenskiy’s victory,” according to Morgan Stanley strategist Alina Slyusarchuk, who raised this year’s forecast for GDP to 3.7% from 2.4% after Wednesday’s data.

Local businesses are similarly enthused, now seeing rosier prospects for the economy, according to a regular survey by the central bank.

Long Road

But lifting growth for a prolonged period won’t be easy.

The dip in the global economic expansion will curb demand for Ukraine’s metals and agricultural exports. And it remains to be seen whether Zelenskiy can stem the tide of emigration to the richer EU.

Another question mark is who’ll lead the new government, with the president still fending off accusations he’s too close to a billionaire whose bank was nationalized under the previous administration.

For Zsolt Papp, an emerging-market debt-investment specialist at JPMorgan Asset Management, important factors in raising growth rates include low inflation, prudent monetary and fiscal policies and a stable legal framework — issues Zelenskiy has vowed to address.

“Boosting Ukraine’s GDP growth in a sustainable way remains a challenge,” Papp said.

Astarta, Ukraine’s biggest sugar producer, is upbeat, citing Zelenskiy’s plan to push through a package of tough reforms in parliament’s first six months.

“We feel cautiously optimistic about the prospects for the economy,” said Yuliya Bereshchenko, Astarta’s business-development, and investor-relations director. “The government has a rare chance to capitalize on the feel-good factor of the general population, which has voted for meaningful change.”

Source: Bloomberg


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