Year’s balance: Ukraine's economy rebounds from its lows
The outgoing year broke the trend of all recent years when the economic situation was deteriorating. And although the financial situation of the majority of Ukrainians has not improved, a lot of things done after the Revolution of Dignity are starting bringing effect, so a modest 1.5% GDP growth with a significant drop in inflation allows to count on the acceleration of growth in 2017. UNIAN recalls the main results of 2016.
2016 was a difficult year, which brought a lot of problems, but also gave many Ukrainians self-confidence and hope that the country could overcome the deep economic crisis.
All hardships the Ukrainian society has been through in the past three years were not in vain. Much of what the president did as well as three different governments, with the participation of the renewed Verkhovna Rada, and local authorities with the participation of civil activists started to bear fruit. Despite the ongoing bloody war of Putin's Russia against Ukraine and continuous attempts of populists and "the fifth column" to change the country’s development vector, the course earlier chosen for the Ukrainian ship toward modernization and Europeanization of all spheres has proved its historical rightfulness.
After two years of a 10% drop in gross domestic product, the national economy in 2016 will report 1.5% growth amid the fall in inflation from the record high 45% in 2015 to 12%.
UNIAN decided to recall the major economic events of 2016 that form the trends of the coming year, which from January 1 will bring a two-fold increase in the minimum wage to UAH 3,200, the expected decline in inflation to 8%, and the acceleration of economic growth to 3%.
Reforms of the new government
A key political decision of the year was a change of government and the appointment of Volodymyr Groysman the new Prime Minister of Ukraine. Groysman replaced Arseniy Yatsenyuk, who had taken the second most important position in Ukraine’s executive power immediately after the Revolution of Dignity and over the two years managed to put the country on the path of reform, preventing financial default and ensuring defense and security development amid war with Russia.
Groysman continued the policy reforms. As soon as he formed a cabinet, he insisted on the establishment of market prices for gas for all categories of consumers. Thus he created the momentum for an actual saving of resources and their effective use, as well as the elimination of corruption schemes on the gas market.
No less important was the dramatic deregulation - cancellation of hundreds of outdated regulatory standards. The new prime minister also supported the practice of competitive appointments to key positions in public companies and engaged in the most problematic sectors – road construction, medications, and customs.
Ukraine’s partners praised the government’s performance. After more than a year's break, the main lender of Ukraine, the International Monetary Fund renewed its cooperation with the Ukrainian authorities and provided the third $1 bln loan tranche in the framework of the Extended Fund Facility adopted in early 2015. This decision "opened" another loan for Kyiv in the form of U.S. government guarantees in the amount of $1 bln.
Kyiv expects that in January, Washington will host a regular meeting of the IMF Executive Board on Ukraine. It may result in the provision of the fourth $1.3 bln tranche. The Ukrainian government stresses that the country has fulfilled all requirements for obtaining money.
One of such conditions was the adoption of the state budget for 2017 with a deficit of no more than 3% of GDP and a forecast 3% economic growth. The document was submitted to the Parliament in time - in September. However, the budget process couldn’t do without a bit of traditional bargaining. The bill on the budget was adopted overnight in late December, although the Rada initially planned to pass it in the beginning of winter.
EU - market No.1
The past year has fixed the trend toward re-orientation of Ukrainian export flows from East to West. A full-fledged launch of the free trade area between Ukraine and the European Union in January 2016, and the painful trade restrictions on the part of the aggressor state (Russia), have made the EU a key market for Ukrainian exporters. The EU's share in the total volume of Ukraine’s foreign trade reached almost 40%. In 2014 it amounted to a little more than one-third of it. Russia’s share has fallen significantly. Today, it does not exceed 15%.
According to the Ministry of Economic Development and Trade of Ukraine, the volume of exports of goods from Ukraine to the EU for the first nine months of the outgoing year amounted to $9.76 billion. The key export items were the products of agriculture and food industry (30% of total exports to the EU, or $2.9 billion), metallurgy (23.5% of exports, or $2.3 billion), mechanical engineering (16.1% of exports to the EU , or $1.6 billion), light and woodworking industries (6.8% and 6.2%, respectively, or $664 million and $608 million). Some sectors have boosted their export volumes. Export of vegetable oil was raised by 8.5%, corn - by 7.2%, semi-finished steel products - by 6.7%, ore- by 6.3%, rolled products - by 5.5%, and ferroalloys - by 2 ,8%.
Ukraine’s Trade Representative Natalia Mykolska emphasized that the key exports from Ukraine to the European Union are raw materials and unprocessed products. She believes Ukraine should focus on the development of the production of goods with higher added value for their further export to Europe. At the same time, at the diplomatic level, it is necessary to have the EU adopt a special regulation to provide Ukraine with additional trade preferences, increasing quotas and easing the customs regimes for Ukrainian goods. The document was developed by the European Commission this autumn, and it is now awaiting approval in the European Parliament.
The active work is underway on promotion of Ukrainian goods in other markets - in North America and Africa. In July 2016, Ukraine and Canada also signed an agreement on the free trade area, providing the Ukrainian exporters the right to sell their products in the market with a total turnover of over $500 billion. Now the document is passing the ratification procedure in the Canadian Parliament.
In early December the Ukrainian Trade Mission visited Kenya and Tanzania where its members held a series of constructive negotiations, determining priority exports to Africa: pharmaceutical products, milk powder, flour, meat, and fertilizers, including organic ones.
Year without Russian gas
In November, Ukraine marked a year since a complete cessation of purchases of Russian gas. In fact, the country started its second ever heating season ensured exclusively with the gas bought at market prices in Europe and its own gas production. Naftogaz of Ukraine assures that the gas reserves accumulated over the summer will be enough for a successful completion of the heating season. In case of the acute need for more gas, there are additional funds for its purchase. This year, the government managed to attract for these purposes a $500 million loan from the World Bank.
At the same time, the Cabinet of Ministers insists that Ukraine should develop its own production by 2020 with the aim to become the exporter of gas instead of importing it. To this end, in late December, the government approved the concept of development of the country’s gas industry until 2020, which implies increasing the volume of fuel production to 27 billion cubic meters per year, which will fully meet the internal demand. Now the volume of internal production barely reaches 20 billion cubic meters. According to the decision made, as early as in 2017, the increase in production should reach at least 500-700 million cubic meters of gas.
No less important in the context of the development of the gas industry is the efficient use of gas transport infrastructure. In the past year, the transit of Russian gas via Ukraine has grown by 20-22%, reaching the volume of over 70 billion cubic meters, with the pumping capacity of 100-110 bcm. In this regard, Ukraine has repeatedly stated its intention to maintain the position of a key transit country to bring Russian gas to Europe and warned of the risks of the implementation of the Russian Gazprom’s projects for the construction of new gas pipelines to bypass Ukraine. According to the Ukrainian government, the new pipelines will not create competition in the European market but they would strengthen the Kremlin's political pressure on the European continent.
Kyiv does not defend this position only at the international meetings but also in courts. Historic hearings have been completed this year in the Arbitration Chamber of Stockholm on the gas dispute with Gazprom. As early as in the first half of 2017, the judges will hand down two key verdicts: on the fairness of the formula of the Russian gas price for Ukraine laid down in the infamous gas contract of 2009, as well as on the recognition of violations of Russia’s transit obligations to Ukraine - both in terms of transit payment and the obligatory volume of gas transited through Ukraine. Mutual claims amount to tens of billions of dollars. In case the court rules in Ukraine’s favor, Gazprom will have to pay Kyiv $4 bln more for its transit in the period from 2017 to 2019 and pay another $12 bln in compensation for the revenues non-received in the period from 2010 to 2015.
Another litigation launched in 2016 will continue next year. In January 2016, the Antimonopoly Committee of Ukraine, after lengthy proceedings recognized Gazprom’s operations in the Ukrainian fuel market a monopoly. The Russian holding company was fined UAH 86 billion. In 2016, the fine was never paid, so by the end of the year, its amount doubled because of interest charges. In December, the Economic Court of Kyiv declared eligible the position of the AMC and ruled to recover from Gazprom the entire amount due.
New records of agribusinesses
The agricultural sector in the past year has retained its title of a leader of the economy and a key component of Ukrainian exports. The growth of agricultural production over 2016 will be at least 3% compared with a 5% drop a year earlier.
Gross grain harvest exceeded 64 million tonnes, which is a historical high for Ukraine. Record harvest has led to growth in exports of this type of products. At the end of the marketing year it will amount to about 42 million tonnes, which will also be a new record.
In 2017, the farmer will try to strengthen this success. The sowing area for the next year's harvest has been expanded by 4% to 8 million hectares, with only 7% undersowed (in 2015 it was over 11%), while 95% of the area has already seen first shoots appear. With favorable weather conditions, Ukraine will be able in the new marketing year to easily enter the TOP 3 of the world’s grain exporters.
Throughout the past year, Ukraine was also actively gaining new positions in the world market of flour, vegetable oil, and sugar. Traditionally, before the conflict, Ukrainian sugar producers traded with Russia. But a unilateral and largely treacherous closing of the market forced many producers to curtail production.
However, the search for new markets was a success. This year Ukraine exported more than 335,000 tonnes of sugar worth $167 million, which is three times the average annual rates of previous years. The total volume of production over the marketing year 2016-2017 will increase from 1.4 million tonnes a year earlier to 2 million tonnes, according to expert calculations. Ukrainian sugar has been in high demand in Asia, Africa, and even in such exotic corners of the planet as Sri Lanka, where the locals have been accustomed to cane sugar rather than beet sugar for centuries.
Livestock industry remains a problematic are of the Ukrainian economy, largely because of viral outbreaks among animals and birds, as well as lower profitability compared to grain harvesting. More concerns are raised with the upcoming termination of a preferential VAT regime. The government promises to compensate for possible losses. The state budget 2017 will allocate UAH 5.5 bln on farmers’ needs, of which UAH 4 bln is direct aid to breeders, plant growers and producers of fruits, potatoes and sugar beet.
Banking system cleansing and NBU easing
In the past year, the National Bank continued its campaign of cleaning up the country’s banking system, recognizing 18 banks insolvent (in 2014-2015, there were over 60 of such banks), eased a number of restrictions imposed in 2015 to stabilize the forex market, gradually reduced the key rate down to 14% and at the end of the year carried out an unprecedented nationalization of the country's largest bank, PrivatBank.
The efforts undertaken by the financial regulator began to bear fruit. This year, the banks’ losses decreased threefold. In 2017, the National Bank expects to record positive results of financial institutions, although it notes that the national banking system remains vulnerable to external shocks. Therefore, the efforts to strengthen the stability of the banks will continue in 2017. The new risk assessment rules, guidelines for banks to reduce lending to related parties, as well as preparation for the introduction of a new liquidity ratio should contribute to these efforts.
The NBU also expects further stabilization in the forex market. After a threefold devaluation of the hryvnia in 2015, the exchange rate fluctuations in 2016 were not at all significant or prolonged. Moreover, almost all of them were due to external factors - the seasonal demand for foreign currency or situational political instability. At the same time, the National Bank successfully eliminated "the waves", from time to time holding currency auctions and carrying out interventions. NBU's leadership has repeatedly stated that it has at its disposal sufficient tools to maintain exchange rate stability.
The volume of foreign exchange reserves has not reached the optimistic forecasts of $17-19 billion, but it was fixed at a quite acceptable mark of $15.5 bln.
This year, the government failed to reach its privatization goals. Great expectations were harbored for the sale of Ukraine’s major assets - Odesa Portside Chemical Plant (OPP), Centrenergo and a number of other state-owned enterprises but they never materialized.
OPP is one of the key enterprises of Ukraine’s chemical industry mired in debt before Naftogaz of Ukraine and other companies. There have been two attempts to sell this asset in 2016. Both times, the biddings failed due to the lack of investor interest, although the State Property Fund has regularly reported about a dozen potential buyers.
In August, after the first failed attempt to sell the plant, it had to suspend operations temporarily because of the rising debts for gas. Then, the company operations were resumed only to "show the goods" and prepare the asset for a re-tender. At the same time the Cabinet, simplified the conditions for participation in the auction and lowered the starting price. But no one risked to buy a "pig in a poke" this time, either.
In late December, the Cabinet restructured the OPP debt before Naftogaz but the OPP announced it would halt all production until the debt is paid in full.
In early January, the government intends to hear the report by Head of the State Property Fund Ihor Bilous and consider whether the country needs the seller unable to sell.
Year of technological wins
The outgoing year was fruitful in terms of the military-industrial development. The increased funding of the defense complex has proven effective. Not only has the government managed to equip and train the army, it also managed to fund production of new weapons meeting the latest combat demands. State Concern Ukroboronprom and its participant companies this autumn held a big arms expo which was an evidence of Ukraine’s significant progress in military technology. Moreover, the government is working on the defense industry development strategy until 2020, with the main target of its transformation into a new stimulus for the development of the national economy – along with the agricultural sector, mechanical engineering, and metallurgy.
A historic completion of a huge shelter arch over the fourth reactor of the Chornobyl nuclear power plant was another success this year. The unique multi-tonne steel structure in late November covered an ugly sarcophagus which had for three decades stood on the site of the destroyed reactor. The arch became a symbol of the new life of Chornobyl, which in the near future has to turn from the exclusion zone into a platform for research and new investment opportunities.
In late December, Ukrainian aircraft manufacturers also pleased the public. State-owned Antonov design bureau rolled out its latest An-132 cargo aircraft made in a joint project with Saudi Arabia. Built in cooperation with Western and Middle Eastern partners, without the use of Russian parts, at the beginning of 2017, the aircraft will go undergo tests in Saudi Arabia, and then go into full-fledged production. Until 2035, global demand for such aircraft is expected to reach 260 units.
These were the main economic milestones of the year. The future will come within a few hours, and we should hope for more success stories, as well as for peace, wisdom, prosperity and health to friends and families. Let the new year bring more victories and fewer losses, more joy and less frustration.