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Ukraine Politics July 2019

Ukraine: Zelensky wins muscle needed to deliver broad-based reform

New President Volodymyr Zelensky’s Servant of the People party came away with a resounding victory in the 21 July snap elections, winning 43% of the vote and 254 out of 424 seats in the Rada. Notably, this marks the first majority to be held by a single party in Ukraine’s post-Soviet history. The result gives Zelensky ample muscle power to push through legislation and enact bold reforms, which should bode well for the economy going forward. However, there is still a degree of lingering doubt, as Zelensky and his party are new political forces in Ukraine and untested in office. As such, it is uncertain if they will have the stomach to push through necessary but unpopular reforms ahead.

Zelensky and his party’s agenda centers on tackling widespread corruption, overhauling the prosecutors’ office, freeing businesses from oligarchs, ending immunity for lawmakers, and increasing military spending. Rampant corruption has weighed heavily on Ukraine’s business environment and these measures could help both boost sentiment and attract investment in the longer-term, while also satisfying the wishes of the IMF. Other economic policy prescriptions by Zelensky and his party are vaguer, although he has pledged to keep the country on its pro-European path and cooperate with the IMF while focusing on ending the military conflict with Donbas.

Negotiations on a new loan program with the Fund should start in the coming months and will likely include the IMF’s typical prescription of tough reforms in exchange for cash. Zelensky’s decisive mandate should make it easier to reach an agreement with the Fund, as he should have the support to pass through demanded measures without wrangling with coalition partners. Overall, Zelensky has struck a promising tone regarding the IMF since taking office; however, he criticized aspects of the past agreement during the campaign trail, particularly over gas price hikes, so there will likely be some sticking points in talks. The country is reliant on continued IMF support to service its sizeable external debt load and, with the current program set to expire early next year, quick and successful negotiations are critical to the outlook.

Looking ahead, growth is expected to slow somewhat this year amid weak export demand, tight monetary policy and as authorities’ hands remain tied by defense and debt commitments. That said, buoyant consumer spending on the back of rising wages should support activity overall. Upside risks to the outlook have increased somewhat with Zelensky winning a decisive mandate, as faster-than-expected reform implementation and successful IMF negotiations could act as a jolt to business sentiment.

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