Ukraine Is On The Brink Of Total Economic Collapse

KIEV, Ukraine -- While we see a great deal of media coverage of Ukraine-related geopolitical risks, there hasn't been sufficient discussion about the dire economic and fiscal conditions the nation is facing.

Ukrainian President Petro Poroshenko

Writing about men in masks fighting in eastern Ukraine sells far more advertising than covering the nation's economic activity.

However it's the economy, that has brought Ukraine close to the brink.

And just to be clear, some of Kiev's economic and fiscal problems were visible long before the spat with Russia.

Ukraine is now in recession.

Deep economic ties with Russia have resulted in painful adjustments in recent months.

The nation's exports are down some 19% from last year in dollar terms and expected to fall further.

A great example of Ukraine's export challenges is the Antonov aircraft company known for its Soviet era large transport planes as well as other types of aircraft.

As the military cooperation with Russia ended, Antonov was in trouble.

It had to take a $150 million hit recently by not delivering the medium-range An-148 planes to the Russian Air Force.

The Russians will find a replacement for this aircraft, but in the highly competitive global aircraft market, it's far less likely that Antonov will find another client.

Here are some key indicators of Ukraine's worsening situation:

1. The nation's GDP is down almost 5% from a year ago and growth is expected to worsen.

2. Ukraine's retail sales are falling at the rate we haven't seen since the financial crisis.

3. And industrial production is collapsing.

4. The most immediate concern however is the nation's currency, which has been trading near record lows in spite of currency controls.

In fact Friday's fall in hryvnia was unprecedented (over 11%), as Kiev fails to stem capital outflows.

5. Inflation rate is running above 14% and will spike sharply from here in the next few months if the currency weakness persists.

Real wages are collapsing.

6. Finally, Ukraine's fiscal situation is unraveling.

In its attempts to defend the currency, Kiev has been using up its foreign exchange reserves.

It is only the access to some IMF funding that has allowed Ukraine's government to maintain some semblance of order in its FX markets.

Moreover, public debt levels continue to rise as the government attempts to keep the Ukrainian banking system afloat.

Fitch Ratings: - Government debt (including guarantees such as NBU liabilities to the IMF) to GDP has quadrupled since 2008, reflecting exchange rate depreciation, fiscal deficits, low growth and below-the-line costs such as recapitalisation of banks and Naftogaz.

There is high dollarisation and foreign-currency exposure, making government solvency, banks' balance sheets and the overall economy vulnerable to sharp depreciation.

A number of economists now believe that given worsening economic crisis, the country's public debt problem is simply unsustainable and default is becoming increasingly likely.

Goldman: - We continue to see downside risks to activity and to our forecast for a contraction of output of 8% this year and for growth of 1% next year.

As we recently argued, this severe economic weakness is likely to cause public debt to rise to 70% this year and 77% next year, above the IMF’s “high-risk threshold” for debt sustainability.

These downside risks to our forecasts further call into question the sustainability of Ukraine’s debt trajectory.

Source: Business Insider


Igor Skakovsky said…
Quote: "Полгода назад украинское правительство объявило о начале налоговой реформы. Планировалось уменьшить количество налогов с 22 до 9. Однако в реальности был введен новый военный сбор. А заявление об отмене налоговых льгот для аграриев подняло на уши фермеров всей страны."
"По мнению Андрея Новака, на сегодняшний день единственной политсилой, которая сконцентрировалась на проблемах селян и фермеров, является новая политическая партия «ЗАСТУП».
«Упрощенная система налогообложения, учета и отчетности, предложенная партией «ЗАСТУП», укрепит сектор малого и среднего аграрного производителя», — отмечает Андрей Новак.
По словам эксперта, партия предлагает принять ряд важных для отрасли реформ. В частности, сохранить специальный налоговый режим для производителей сельскохозяйственной продукции и ввести налоговые «каникулы» для начинающих фермеров. Это, по мнению Андрея Новака, позволит малому и среднему бизнесу развиваться. ForUm"

Ukrainian agrarians must fight to increase Tax brakes for agricultural sector including simplifying Tax system and lowering the Tax throughout the whole sector.

Igor Skakovsky said…
Quote: "Сахарные заводы по состоянию на 15 сентября произвели 130 тыс. тонн сахара. Об этом сообщил председатель ассоциации «Укрсахар» Николай Ярчук.
По его словам, на сегодняшний день собрано и завезено на сахзаводы почти 2 млн тонн сахарной свеклы, передают «Украинские новости».
Представитель отрасли также добавил, что, по состоянию на сегодня, работают 32 завода.
На эту же дату в прошлом году работало 3 сахзавода, было произведено 18 тыс. тонн сахара."

Ukrainian Government should consider cooperation and experience transfer from Brazil.
Brazil successfully implemented its fuel independence program. It took Brazil some 30 years to implemented but it can be considered a success story.

Quote: No. 614
Monday, April 07, 2008
by D. Sean Shurtleff
Nationwide, average retail gasoline prices are nearing the all-time inflation-adjusted high of $3.40 a gallon reached in 1981, lending urgency to renewed calls for U.S. energy independence. Analysts often tout Brazil as the epitome of energy self-sufficiency. Brazil imported more than 80 percent of its oil in the 1970s, but it likely reached energy independence by the end of 2007, according to projections from the U.S. Energy Information Administration (EIA). Brazil's success is commonly attributed to its thriving ethanol market, but this is at most only a small part of the story. More critical to Brazil's energy independence is its significant increase in domestic oil production.
In December, President Bush signed into law the Energy Independence and Security Act of 2007, which mandated that refiners increase the amount of ethanol blended into gasoline from 5.4 billion gallons in 2005 to 9 billion gallons in 2008 and 36 billion gallons by 2022. This policy seeks to emulate Brazil by increasing the use of ethanol, but in many respects it is misguided because Brazil's energy situation is so different from that of the United States.
Brazil's Ethanol Program. In 1975, primarily in reaction to skyrocketing oil prices, Brazil launched its National Alcohol Program, ProAlcool.
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