LONDON -- The messaging from the reform camp is increasingly fraught/frustrated, as the Poroshenko Administration seems to be stalling/even going backwards now in terms of reform.
First, still little progress to write home about on the IMF front, with no signs of any progress in kick starting the fourth review under the EFF. Remember that this review was supposed to have been completed back in April. Ukraine should have been on the ninth review by now, rather than only having completed the 3rd review. Ukraine is even going back on some of the commitments made therein, including the hike in gas prices, which was to have been introduced back in July. Alongside the gas price issue, the IMF is still unhappy over the pension reform bill passed earlier this autumn, Privatbank reform, the anti corruption agenda, NBU governorship, et al – all from the 3rd review.
The Fund kind of gave a pass on the requirement for progress on land reform from the fourth review, but I think hoped to see some steps in the right direction by year end. Little seems to have actually been achieved. President Poroshenko this week indicated that, while he supports land reform, there is no point pushing forward unless there was an accurate land registry. Well correct. But, 25 years since independence, and with Poroshenko now in office as president for three years, we might actually have expected more progress.
In the fiscal sphere, an IMF technical mission visited Kyiv last month to review the budget for 2018. It seemed to be more than a technical mission as, unusually, the IMF desk chief from D.C. also joined. Likely he wanted to better understand the local commitment/buy in to the current program.
I doubt the Fund was enthused to hear of two new initiatives by the Presidential Administration and the government. One, from the Presidency, plans to replace corporation tax with a tax on distributed capital. The second, from the Prime Minister’s office, plans a 24-month deferral on VAT paid on imported equipment.
Both are likely to undermine the revenue base of the budget, and are unlikely to be supported by the IMF. I expect these to be added to the now long list of concerns for the IMF - putting off/out the timing of any re-engagement with the IMF. I don’t even see it in H1 2018. I have hope of re-engagement with the IMF this side of 2019 elections.
Second, the government failed to secure the release of the final EUR600 million tranche of macro financial assistance from the EU by the deadline. Hence the funding lapsed. Four outstanding areas of concern for the EU remained unresolved: the ban on the export of timber, the launching of automatic checks on electronic declarations, adoption of a law on the NBU’s credit register, and launching checks on company beneficiaries.
The Administration has tried to spin this positively, suggesting that the EU is looking to extend another three tranche EUR1.8bn MFA for Ukraine. But this seems more likely to be wishful thinking from the Ukrainian side -- without existing issues resolved, and with the IMF program still stalled. In the past the EU has tended to view progress in the IMF front as a pre-requisite for MFA disbursements. Given slow progress still on the anti corruption agenda, this just adds another reason for the EU to stall.
Third, on the anti corruption front: few people have been brought to account - I cannot think of anyone - for last misdemeanors, with little progress on the issue of anti corruption courts. Meanwhile, we see the unedifying sight of the NABU and the PGO engaging in open warfare last week. I guess as long as the latter two agencies are busy infighting, corrupt elites rest safe. The downside, though, is that domestic and foreign investment will continue to stall.
Fourth, the rumor mill in Kyiv is again rife with rumors over the position of the Finance Minister, Oleksandr Danyliuk. The State Fiscal Service once again launched an investigation into his tax filings for the period when he worked overseas, clearly not understanding the double tax treaties Ukraine has in place.
Danyliuk marked himself out as an effective reformer in the current administration - trying to reform the SFS, so he created numerous enemies there. Obviously this also has marked him out for special attention from the SFS. It has long been known that his position is coveted by individuals in the Presidential Administration. I sense a crew would like to return to the ‘grace and favor’ VAT refund gig, which Daniliuk reformed to root out graft.
I have long argued that a group within the Administration is opposed to the IMF program, is unwilling to do much of the anti corruption stuff, which is really now central to the reform agenda and the IMF program. They think that by keeping the program off track, they can stall on the agenda. They likely are selling the message to the President that Ukraine does not need IMF financing, and can now go it alone.
Freed from the shackles of the IMF program, they feel they can pump prime growth to ensure Poroshenko secures a second term in the 2019 elections. It is notable now how anyone offering fair, objective criticism of reform failures is branded as unpatriotic. This also dovetails with centralization of political control around the President.
It seems that political technologies are being rolled out to rein in the opposition - populist and reform democrat alike. The message is that only the Poroshenko Administration can offer stability, security in the East, albeit not really bringing radical, but much needed reform, and keeping economic performance mundane.
On the economy, growth/recovery is stalling.
The NBU’s production index, a decent gauge for real GDP, dropped 1.6% YOY in October, albeit was still higher by 2% YOY for the period January - October. Full year growth looks set to come in below 2% which is a major disappointment, given the near one fifth real GDP contraction for the 2014-15 period. This had provided a very favorable base.
Inflation has remained stubbornly in the mid teens despite the stellar best efforts of the NBU. The current account deficit also is on a rising trend.
Worryingly, investment is weak. The quality of growth seems poor, driven by private consumption and hardly sustainable. This looks set to continue into 2018 and through to the elections in 2019, with fiscal easing likely the order of the day, already seen with big hikes in pensions.
This all just seems a repeat of the period 2011-2013 under former President Yanukovych.
The big question the Poroshenko Administration should ask is: why investment, domestic and foreign, is still so weak?
I wager it is because not enough has and is being done to address the problem of corruption. But unless it is addressed more wholeheartedly, investment and growth will not pick up pace.
Timothy Ash is senior sovereign analyst for Blue Bay Asset Management in London.
Slider photo; President Poroshenko speaks Friday at the InterContinental Hotel in Kyiv, to a business meeting hosted by the European Business Association, the American Chamber of Commerce in Ukraine (UNIAN/Mikhail Palinchak)