Ukraine: Pace of contraction slows in the fourth quarter, political tensions push government to breaking point
March 4, 2016
Better data continue to emerge concerning Ukraine’s battered economy, suggesting that it is nearing the road to recovery. GDP contracted 1.2% in the fourth quarter of last year, according to a preliminary estimate by State Statistics Service of Ukraine. While the result marked another contraction, it is a stark improvement over the 7.2% fall tallied in Q3 and confirms that the country’s downward spiral driven by the military conflict in the east has bottomed out.
While news regarding the economy is brighter, the political situation in the country has deteriorated rapidly in recent weeks. Political tensions reached a breaking point in February as government infighting over the pace of reforms and corruption allegations along with record-low public approval ratings led to a surprise statement from President Petro Poroshenko calling for Prime Minister Arseniy Yatsenyuk to resign and a technocratic government to be installed. While Yatsenyuk managed to survive the subsequent no confidence vote on 16 February, two small parties quit the coalition government, bringing it to the brink of collapse. Yatsenyuk now has to rearrange his coalition and confirm a new cabinet to avoid snap elections. At this point, it appears that Yatsenyuk has the necessary support to form a new government, however, political tensions are likely to remain elevated in the near-term.
Moreover, the government faces a number of challenges in the coming months. The country hasn’t received a disbursement from the IMF since August and sluggish reform implementation is slowing the next bailout review. In addition, Russia filed a lawsuit against Ukraine over the country’s failure to repay a USD 3 billion debt on 17 February, setting the stage for a long legal battle. Furthermore, public approval is unlikely to turn around without a drastic improvement in economic fundamentals—particularly inflation and unemployment levels—increasing pressure on government leaders. A lasting resolution to the conflict in the eastern regions of the country remains key to a sustainable recovery, however, little progress has been made. Commenting on Ukraine’s outlook, Alexander Valchyshen, Head of Research at Investment Capital Ukraine adds:
“In our base-case scenario, there are two key assumptions in the area of Ukraine’s domestic politics and geopolitics. First, the current “political crisis” is resolved within the next couple of weeks, and with a 60% probability, government and coalition reshufflings are to take place, avoiding snap parliamentary elections in 2016. Hence, the IMF programme is resumed. Second, our more-than-a-year-old scepticism over the Minsk agreements allows us to assume that the eastern part of Donbas and the border are to remain out of the control of Ukraine’s government. The Russian military is not withdrawing.”