Ukraine before, during and after COVID-19: key changes in economy and prospects – Dimitar Bogov




COVID-19 pandemic has “shaken” the economy of not only Ukraine, but also of many countries with more sustainable positions. At the same time, Ukrainian banking system appeared to be stable enough before the pandemic challenges – lockdowns, deteriorated growth of the GDP, etc. APK-Inform asked Regional Lead Economist with EBRD Dimitar Bogov about the economy development before and during the COVID-19 pandemic, and its prospects after such a difficult period.

- Dimitar, how would You characterize the economic situation in Ukraine before the outburst of the COVID-19 pandemic and how the economy has changed?

- Before COVID-19, since the beginning of last year Ukraine was characterized with quite stable macro-financial situation, which was the result of good macro-financial management and cleaning of the banking system in the previous years.

Ukraine had very low fiscal deficit in the last years – around 2% of GDP and this came as a result of large efforts in cleaning the large quasi fiscal deficits of Naftogas, which was reduced to zero. That contributed to quite stable situation on the fiscal side.

At the same time, public debt in Ukraine was sharply declining. If, for example, in 2016 public debt to GDP was 80%, just before the hit of COVID-19 it fell to 50%. This was result of growing GDP in meantime, and also of significant appreciation of Ukrainian hryvnia in 2019. Also, external financing stabilized and the deficit in the balance of payment was around 2% of GDP, which was relatively low, and this was finance with external inflows that Ukraine enjoyed every year. Inflation was also stabilized – it came below the target level of National Bank of Ukraine and this means there was quite stable environment for operation of the economic entities. Banking system after cleaning was well capitalized and liquid and it started to be quite profitable just before the economic crisis.

However, we saw that the growth was losing the momentum even before the COVID-19 pandemic. For example, in the last quarter of 2019 the growth was just 1.4% and then in the first quarter of last year it was already negative. Of course, in March we already saw the impact of pandemic but even in January and February the economy was slowing down. Then pandemic hit quite strongly, especially in the second quarter like everywhere in the world. In the last quarter of 2020, we saw some hope that the economy might soon get at the positive territory.

- Please, tell us more specifically, how has the economy been developing in the current year, a year after the pandemic hit, and what changes took place in certain major areas (industrial, trade, etc.)?

Despite that, GDP in the first quarter was again negative: -2%, as a result of the new wave of COVID, however, we already see some improvement, some recovery in the second quarter. If we look at the short-term economic indicators, we see optimism among the businesses and the consumers. So, if for example the bottom was reached in the QII of last year, now the situation in QI and QII of this year is much better. But we see that economy is still below the levels that we saw before the hit of the pandemic. 

Similar situation is in industry and in construction where there is some recovery but still the economy didn’t reach the pre-crisis level. It is also similar in retail sector, although the retail trade last year was one of the most successful and it actually grew, compared to all the other sectors that went to negative territory.

Situation is probably the worst in services sector which was objectively the most affected by the pandemic and the optimism is not returning with the same speed as in the others industries.

Based on it, this year we expect growth of around 3.5% of GDP after 4% decline last year, and the positive dynamics will continue in 2022.

- If we compare the influence of pandemic on the Ukrainian economy and on the other European countries’ economies, what are the similarities and differences? How do You evaluate the Ukrainian financial system performance during the pandemic?

- It should be said, that Ukraine featured quite better than most of the countries in Europe where the decline was going up to -10%.

Looking deeper in characteristics of Ukrainian economy and what happens in key sectors it should be mentioned that macroeconomic stability was preserved during last year, thanks to significantly improved macroeconomic management in the previous 5 years. As a result, although we saw some strong effects in the beginning of the pandemic on the exchange rate, like in most of the emerging economies, later the situation stabilized and inflation was throughout last year very low, below the targeted level.

But recently, from the beginning of the year, the inflation is peaking up and the main reason is rising of food prices and crude oil.  In April we already saw 8.4% inflation. But fortunately, NBU reacted in professional and timely manner, they already raised policy rates from 6% to 7.5%. There is confidence that this picking up of inflation is only temporary and in the end of the year we will see some moderation. Expectation is that exchange rate more or less will remain quite stable, with occasional fluctuations.

- How would You characterize the external sector of Ukraine? What are the main latest changes in this segment?

- In external sector we saw quite different picture to the usual for Ukraine. For example, trade deficit improved significantly and this was result of large fall of import, export also declined although much less than import. Ukraine usually has a current account deficit of around 2% of GDP but last year it had 4% surplus which was a result of improved trade deficit but also of improved balance of services. Ukrainians were travelling less abroad and spending much less abroad so this also contributed to significant improvement current account of the balance of payment.

International reserves are hugely dependent on external borrowing so we see quite high volatility during the last year and the beginning of this year.

- Dimitar, please, tell us more about the current financial situation in Ukraine. How has the GDP changed during the COVID-19 pandemic and what are the result of the change?

- If we look at the fiscal situation, it was opposite of external sector. In the external sector we saw improvement, but in the fiscal we see deterioration, which is logical. Most of the countries reacted on the crisis by increased spending, as Ukraine did, and because of this increased expenditures, deficit went to about 5% of GDP opposite to the previous year when it was around 2% of GDP. And this contributed to rising public debt. If, let’s say from 2016 to 2019, public debt was reduced from 80% of GDP to 50%, last year we saw reversal of this trend and public debt rose to 61%. Mostly this was because of GDP decline, but also there was depreciation of currency and some new debt flows. This means that debt repayment for the following years will remain substantial for Ukraine. Herewith, September is usually the month when the most of payments are coming due, thus it is a critical period for debt repayment to abroad.

- And how would You evaluate the banking system? How did it manage the crisis?

- It should be mentioned that banking system was quite resilient. Actually, banking system behaved very well during the crisis. Capital adequacy was even strengthened last year. Nonperforming loans stopped to decline, but they didn’t increase much during last year. This contributed to profitability, which was smaller than in 2019, but it was still positive. It is very important that banks remained very liquid, very strong positioned which means they are ready to support the recovery of Ukrainian economy.

- Considering all above-mentioned changed that took place before and during the pandemic, what about the current situation in Ukraine?

- We saw some short-term indicators which point to recovery but these are coming with time lag of 1-2 months.

Last year it became very fashionable to look at Google Mobility data, that is most up to date indicator of economic activity. Google Mobility data show mobility of people to work, to shopping centers, to recreational areas, to transport hubs like bus stations, railway stations. Here we see that in Ukraine this mobility is still below the pre-pandemic level, around 10% below, but, nevertheless, shows an improvement of economic activity compared to previous quarters. It means that economy will start improving and coming to pre-crisis level possibly in the second half of the year.

-  What would You say about the external activity of Ukraine? What factors influence the development of this segment and what should we expect in the current year?

- In Ukraine not only domestic demand declined, but external as well, which negatively affected the economy. But it seems that terms of trade this year are in favor to Ukraine. Because if you look at the global commodities prices, we see very high increase of iron ore prices, which doubled, and corn, soybeans and even wheat prices increased substantially as well. All these points to very favorable condition because these are very important export products of Ukraine.

This means that Ukrainian agriculture will benefit this year from rising prices on the global markets. Moreover, it is expected that harvest in Ukraine will increase compared to last year, which will lead to higher export.

- In conclusion, Dimitar, what are the main factors we should pay attention to, which are going to have significant influence on the Ukraine’s economic development?

- Certainly, its COVID-19. Uncertainties are still there, we cannot say that COVID is defeated and behind us, so, we have to be cautious. 

Than, there is question about standby program with the IMF which, if conditions are fulfilled, will enable Ukraine to receive somewhere between $2-$3 bl this year under very favorable terms. If we add to this that IMF is preparing new SDR allocation, which means creation of reserves for every country, and Ukraine can receive additional around $2.7 bl. So, if conditions of stand-by program, which is ongoing, are fulfilled, Ukraine will receive significant funds from the program, and this new allocation, which could remain available for next year, will provide financing of external liabilities for this and next year and Ukraine will be in a quite comfortable situation.

Then we have a forthcoming opening of land market which is also a huge opportunity for agricultural sector. But we should be quite cautious here and we know that things could go always wrong if there are some deviations of the rules and its implementation.

So, let me conclude. COVID-19 took a significant toll on Ukrainian economy last year, but still the fall was less than in most of European counties. Macroeconomic stability was preserved and this is a good base for recovery that we expect this year, although this recovery will be gradual. Ukraine could benefit from rising commodity prices especially on grains and iron, where Ukraine is large exporter in the world. Certainly, focus should be back on reform agenda and creation of better environment for businesses.

Interviewed by Ekaterina Mudriyan