UKRAINE: POLITICAL AND ECONOMICAL FREEDOM

There's been a lot of uncertainess on UAH stabilitity during the last 2 years. When global crisis started, central bank was forced to depreciate local currency in front of USD 60% to today's actual exchange rate ( 8 UAH = 1 USD ). During last year, a lot of rumours were around regarding the collapse of the local currency. State could not manage to level income and expenses of national budget, and fears of Central bank of Ukraine using the increase of monetary mass ( M1 ) as a way for the State to be able to execute payments of pensions and debts in the inside market were very frequent.

During 2010, state buget reached a record high deficit of 11% and inflation went higher than expected reaching double figures. At some point, during last summer, new goverment was facing a very strong problem due to the shortage of revenues to be able to pay expenses.

At that point, Goverment had 3 possible solutions:

a.Issue of  10 year State Bonds.
b.Look for Private Creditors on the International Banking Arena.
c.Ask IMF for new trench of the agreed loan for Ukraine.

Each of this options depended on the attitude of the Ukraine Goverment towards political and economical questions which would satisfy possible lenders.

Financial markets did not recieve very enthusiastically the announcement of the new issue of SB. For these reason, Ukraine Goverment decided to cancell this plan as yield was rating up to 8,75% year which was not acceptable, in our opinion with the right decision, for the Ukranian Goverment.So, Goverment had 2 options left.

With a much more pragmatical approach on their relationship towards Russia, new Goverment  has been able to ease problems with Kremlin, which has opened the possibilty to collaborate more closely with russian state and private organizations. As a result of that, VTB agreed to lend at a very political 6,7% year interest rate a loan of 2 bilion $ which has been recently extended for another 6 months which has eased situation and pressure to the UAH.

From the other side, IMF approved during last August 2010 a loan of approx. 15 bilion $ at a 3% year rate which helped the Goverment to secure its financial stability for 2010.

Both loans, are based on strong promises from Ukranian authorities to undertake reform which will not be very popular and could harm its popularity. Goverment has to tackle the main problem which remains the fact that, at least, 50% of economy continues on the shadow. New legislation and more control should improve this situation. From the other side, State has been 'forced' to privatize part of its more 'strategical' assets including Ukrtelekom and some heating and electricity distribution utilities. Obviously, companies and persons favoured by this process will be related to the decision taken to provide these loans to save state financial stability during 2010. It is difficult to say, if it has been a good decision by the Goverment, but the urgency of the situation did not allow them to analize possible 3rd options.

Goverment and politicians seem to have understood that either they are able to stabilize State Budget increasing revenues and controlling increases of expenses or their independence to take decisions will be seriously jeopardize.

State Budget for 2011 forecasts an increase on revenues around 10,5% and an increase of expenses of 4,6%, in an scenario with a GDP growth of 4,5% and an expected inflation of 8,9%. It is hard to see how this results will be obtained...specially what refers to inflation as increase of prices of energy at international level will have consequences on prices at local level. Rergarding revenues, we will have to ckeck success of measures taken by Goverment in order to increase income with companies and private persons still under pressure from economical crisis and lack of financing due to previous collapse of local banking system which has seen its international sources of financing being dramatically reduced.

If these goals are reached, Goverment will be able to finish 2011 with a State deficit of 3% which would be a very satisfactory result bearing in mind situation during previous 2010.

In case these results are not obtained, Ukraine could enter a very dangerous spin down, being forced to depreciate again its currency, being unable to control its inflation and facing a situation where it would be unable to run its own political and economical strategy but the one being dictated by those ones who would be financially rescuing it.