Ukraine’s Court Jester Jostle
Ukraine stocks and bonds were on edge though the half-year as decent growth collided with anti-corruption failure to unlock IMF aid, going into the election cycle with President Poroshenko’s popular approval in single digits and perennial candidate Tymoshenko the front-runner after her rocky previous tenure. The MSCI frontier index was flat and fixed income struggled with debt repayments due to double to $7 billion next year, almost half of current reserves. First quarter GDP expanded 3% on improved metal exports and private consumption, but the rebound paled against 2017’s 15% contraction. Inflation is still at that level after sharp currency depreciation, bad weather affecting agriculture in the south which could halve the grain harvest, and the border war with Russia with its lingering bilateral export embargo. Duty free quotas under the EU free trade area do not match market losses, and the current account deficit has only remained a manageable 2% of GDP through slashed imports. The main inflow is $10 billion in remittances from Poland and other neighbors given miserly wages at home. The US and Russian Presidents met for a mid-July summit with the Minsk peace process stuck, and the Trump administration yet to convey support for the $17 billion IMF program, only half disbursed with the inability to meet fiscal and structural targets. The long-debated anti-corruption court became law, but was essentially gutted with appeals sent to the regular judiciary. The budget deficit could be double the 2% goal with gas charge delays and a pre-election spending splurge. The central bank leadership has changed after sector rescue and has monetary policy on hold, but may be forced to tighten as debt default jitters again emerge with expiration of the initial big haircut deal. Opposition party stalwart Tymoshenko won international sympathy for her reported mistreatment as a political prisoner, but may be reprising a populist economic platform that regularly clashed with promised Fund loan adjustments.
More successful Balkan pupil Serbia was off 1% in its MSCI component as the Q1 growth pace neared 5% on buoyant domestic demand, with investment also spurring an import surge in external accounts. Inflation is under 1%, as the central bank in contrast with the surrounding region has battled currency appreciation with regular intervention. Croatia was down over 10% with growth at half its neighbor’s pace ahead of the peak summer tourist season, amid reports of widespread labor shortages. Early elections may still be called with the ruling coalition hanging by a thread after resignations and infighting over the collapse of the Agrokor conglomerate, employing tens of thousands with EUR 8 billion in debt. Hundreds of representatives gathered in a Zagreb arena in July, to reach an equity conversion and loan write-off deal leaving Russian state banks with 45% control. A special law ordered the restructuring, with the former chief executive, who escaped to London, and associates still under investigation for criminal fraud. The settlement came a week before a rescue deadline under the statute, and officials hailed it as an antidote to “illiquidity and bad corporate conduct” with implementation due into next year even if the powers in ultimate charge are also reshuffled.
