Political sustainability of reforms in question
Overview:
The global financial crisis has exacerbated some of the underlying policy weaknesses in Ukraine and caused considerable financial market turbulence. The authorities have responded by securing a US$16.4 billion IMF package to support a program of comprehensive economic reforms. Despite the speed with which the IMF loan has been approved and the significant initial disbursement (US$4.5 billion) Ukraine will continue to face significant challenges as it seeks to restore confidence in its financial system. An unfavourable combination of a dramatic credit boom, loose fiscal policy and excessive wage growth have fuelled inflation and a sharp deterioration in the external balances. Vicious political infighting has delayed some economic reforms and may continue to fuel more populist economic policies.
Recommendation:
Ukraine is about to undergo a particularly sharp economic slowdown. Extremely unfavourable global economic conditions and the rising price of gas imports from Russia will necessitate much tighter monetary and fiscal policies to reduce inflation and reverse a dramatic deterioration in the current account deficit. These measures will be extremely unpopular and, therefore, difficult to implement in full. Political noise will also remain high as presidential elections approach in late 2009. We therefore remain underweight on Ukrainian external debt.