High-risk Ukraine is back on the radar

Ukraine’s fall from grace is well documented. Its Euromoney risk score has plunged by almost 11 points since 2010, to a lowly 28.5 out of 100, and by 18 overall since 2007.

Yet after sliding to its lowest level in 2014, to 150th out of 186 in the global risk rankings, the country has been crawling back within the highest-risk group of sovereign borrowers (ECR’s tier-5), gaining 3.2 points in total, and rising to 141st on a steady upward trend.

That makes Ukraine less risky than Moldova, and Bosnia-Herzegovina in the survey as well as a considerably safer bet than Venezuela, on the brink of default:

Positive signs

Improving economic fortunes have undoubtedly helped.

In 2016, after two years of deep recession promulgated by the twin political and commodity crises, GDP growth rebounded by 2.3% in real terms.

The economy should expand by 2% this year, before picking up pace in 2018-19 to 3-4% most experts suggest. Inflation will ease, and the current-account deficit will narrow from 4.1% of GDP last year to 3% by 2018.

The currency, floated by the central bank in 2015, has stabilized, reserves have grown to $19 billion without the IMF’s support, and the government has dispensed with energy subsidies.

It has made Naftogaz, the state energy firm, profitable, stopping the drain on resources, and has gone some way towards rooting out corruption, and strengthening the banking system, thereby improving the relevant risk indicators in Euromoney’s survey.

Lilit Gevorgyan, senior economist and country risk analyst with IHS Markit, notes the stoic mentality of the population affected by the hardship and uncertainty stemming from the 2014 revolution and Russian aggression.

“They tightened their belts willingly, hoping that their second revolution would not be wasted, and that the best answer to Russia’s warnings, that without Russia, Ukraine would collapse, would be to make the Ukrainian economy stronger and with less corruption.”

Iikka Korhonen, head of research at the Bank of Finland Institute for Economies in Transition, adds that many investors are now looking for any markets that give reasonable yields, and Ukraine has done many things right.

“It looks like the corruption court might move ahead, and they are making the right noises about pension reform.

“Latest sounds [about the IMF tranche] have been encouraging, but with Ukraine everything takes time.”

Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, agrees the economic situation in Ukraine has become more stable, citing the recovery built on a marked upturn in domestic demand and conducive global environment.

“In my view, Ukraine does not really need the IMF’s money as long as the global environment remains benign and nothing dramatic happens inside the country.

“It will probably not come before end-2017 anyway, reportedly because of the disagreement with the IMF over gas prices.”

High risks

However, Astrov, as with other analysts, notes the potential for political instability in the light of recent demonstrations organized by former Georgia President and Ukrainian politician Mikheil Saakashvili, and others, which can be arguably referred to as a ‘right-wing’ opposition (i.e. more hawkish on Russia/Donbass etc).

The opposition is trying to capitalize, among other things, on the popular dissatisfaction with corruption, and the social impact of the gas price and pension reforms.

“It is crucial for President Poroshenko not to repeat the mistakes of Viktor Yanukovych [ousted in 2014] under similar circumstances: not to over-estimate his own power position and not resort to excessive force to suppress the protests,” Astrov says.

Gevorgyan also believes the window of opportunity for pushing through painful adjustments and major structural changes is closing.

“The oligarchic web is a key constraint of economic development,” she says, “while households are not seeing any notable improvement in their incomes.”

Annual inflation, after all, has crept up to 16% in recent months with wages failing to keep pace.

It is unclear, moreover, if the government will toe the line on the IMF’s demands given the improving access to international finance and economic situation.

Some political actors, and parts of the media are arguing for a friendlier approach towards Russia. Plus, an easing of austerity is a politically convenient vehicle ahead of the next presidential and parliamentary elections to be held in 2019.

Ukraine’s fortunes are improving, and its risks are slowly easing, but its future hangs in the balance.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.