bne IntelliNews – Imposition of martial law in Kyiv will hurt Ukraine’s economy

kyiv’s decision to impose martial law for the next 30 days will hurt Ukraine’s economy by further undermining investor confidence in the country’s future.

Ukraine’s parliament, the Verkhovna Rada, gave the green light to declaring martial law in the country for 30 days on November 26 after a dramatic escalation of a conflict between Ukraine and Russia in the Sea of ​​Azov this weekend.

At the same time, the country’s President Petro Poroshenko hesitated to impose it for 60 days, which would have resulted in the cancellation of the March 2019 presidential elections. However, even if there will be no direct impact on Ukraine’s economy – and most importantly, martial law will not prevent Ukraine’s main donor, the International Monetary Fund (IMF), from handing out its next badly needed slice of cash – it will undermine the already fragile faith investors have in the country’s future and are preventing both investment and privatization from happening.

IMF program

According to the IMF, there are no legal restrictions on further cooperation with Ukraine on a new $3.9 billion stand-by arrangement (SBA) with the IMF in October after the establishment of martial law.

“We are following recent developments, including the imposition of martial law, and hope for a rapid de-escalation of the current situation,” Resident Representative to Ukraine Goesta Ljungman said in Kyiv on November 26. “The IMF has no legal restrictions on continuing cooperation with Ukraine in this situation.”

Last week, the Verkhovna Rada adopted the national budget for 2019 with a projected deficit of 2.3% of national GDP, which is below the maximum of 2.5% acceptable to the IMF.

The budget also included an increase in defense spending to around 5% of GDP, which is a burden on an otherwise cash-strapped economy. Defense and security expenditure (which includes police forces and border guards) in 2019 increased to UAH 211.9 billion ($7.6 billion) from total expenditure of 1.11 trillion UAH ($39.6 billion). Approval of the IMF-compliant budget is of crucial importance for Kyiv’s cooperation with the donor.

Among other conditions the increase in the price of gas for households, as well as the implementation of anti-corruption measures. Ukraine has so far received $8.4 billion from the IMF under the multinational lender’s EFF.

Bond price reservoir

The immediate effect of the imposition of martial law was to depress the prices of Ukraine’s international bonds as tensions over the waters of the Sea of ​​Azov erupted.

Ukrainian government bonds fell to their lowest level since issuance as the conflict erupted. The incident sent yields on some bonds to their highest since being sold in the past 12 months, Bloomberg reports. The hryvnia was on track for its biggest daily decline in five weeks against the dollar.

The yield on dollar-denominated bonds due 2032 rose 31 basis points to 10.24% at 9:03 a.m. in London, the highest since it was sold a year ago, Bloomberg reported. The hryvnia slipped as much as 1.6% against the dollar.

It has also been reported that the NBU may cancel this week’s bond auction, which has become a major source of funding for the government as it struggles to honor some $3 billion in debt securities coming in at due this year, despite the issuance of a Eurobond of 2 billion dollars in October after the announcement of the new agreement with the IMF.

If tensions continue, they will increase the cost of borrowing in 2019, as Ukraine has about $6 billion in public debt to refinance and a total of about $15 billion maturing next year, the court said. last week Finance Minister Oksana Markarova to journalists. This high level of debt repayment comes from the refinancing of the 2014-2015 debt.

The central bank intervenes

Meanwhile, the National Bank of Ukraine (NBU Governor Yakiv Smolii believes that the decision to introduce martial law would in no way affect the functioning of the Ukrainian banking system.

“I would like to say that the decisions that would be taken would not affect the functioning of the banking system,” the governor said Nov. 25. “Bank branches and offices will operate as usual, and the decisions will not influence the operation of the banking system.” banks.”

Later, on November 26, the central bank urged commercial lenders to keep enough cash in ATMs to meet the possible increase in demand due to the expected panic triggered by the introduction of martial law in the country. “The NBU asked banks to take measures to keep enough cash in ATMs and promised, if necessary, to support banks in refinancing,” Smolii said in an extraordinary meeting with executives of the 40 largest banks, an unnamed source told Interfax.

Meanwhile, the country’s Deputy Prime Minister Pavlo Rozenko believes that in all social payments, allowances, pensions, salaries and other payments will be made on time, in full and without restrictions.

“To stop speculation on this sensitive subject, a few words on the impact of the possible imposition of martial law on the state’s social payment system,” the minister wrote on his official Facebook page. “In view of the country’s stable and predictable financial and economic situation, all social payments, benefits, pensions, salaries and other payments will be made on time, in full and without restrictions.”

General business environment

Although there is unlikely to be an immediate effect on Ukraine’s economy, escalating tensions and the imposition of emergency powers can only further undermine Ukraine’s already poor image in investment matters.

New foreign direct investment in Ukraine was just $1.9 billion in 2017, the State Statistics Service said. About a quarter, or $506 million, came from Cyprus, presumably Ukrainian or Russian offshore money. The next four sources were: Russia – $396 million; the Netherlands – $262 million; Great Britain – $212 million; and Germany – $119 million.

Ukraine must increase this amount of investment several times if it wants to return to growth.

In addition, increased uncertainties could derail the privatization program, which is another key reform process.

Ukrainian Finance Minister Oksana Markarova said a week ago that the target of UAH 17 billion in privatization payments announced in the national budget for 2019 was realistic.

At the same time, Markarova recalled that previously expected state budget revenues from privatization have been replaced by borrowing. “Each time we borrowed more than expected to replace that amount, which was not received from privatization,” she said.

Top of the agenda this year is the sale of a 78.3% stake in power generation company Centrenergo before the November 21 deadline with a starting price of UAH 6 billion ( $215 million) for which five companies have signed up. However, the rules require at least two bidders for the auction to take place, one of which must be a foreign company, which will be harder to do now.

The tender to sell Centrenergo’s stake is scheduled for December 13, which will fall under martial law and will therefore most likely be postponed to the new year now.

Christi C. Elwood