The Ukrainian parliament adopted a law to create a special anti-corruption court. The same day, the lawmakers voted to sack Finance Minister Oleksandr Danylyuk – praised by investors for pushing through reforms – after he publicly fell out with the prime minister.

Impact on country risk

The adoption of the law is a positive development.  However, it would not be sufficient for the IMF to approve its fourth review which was scheduled in May 2017. After all, the IMF requires progress in a number of fronts regarding issues including the energy sector – gas prices for households have not been adjusted for two years despite international prices hikes –, fiscal policy and the approval of the appropriate law setting a strong and independent anti-corruption court. The Fund is now likely to check whether the adopted law meets its requirement.

The perception of corruption is high in Ukraine, as highlighted by its 130th rank in Transparency International’s Corruption Perceptions Index 2017. Hence, the progress to tackle corruption – if well designed – would improve the business climate and consequently foreign-investor perceptions. In the long term, it is likely to boost foreign direct investments which have slowed since 2014.

Even if Credendo still classifies Ukraine’s systemic commercial risk in category C – its worst category on a scale from A to C – the systemic commercial risk has been improving. Indeed, real GDP growth is likely to further accelerate this year to 3.2% (from 2.5% last year). Inflation – which surged in 2014-15 – has declined but remained in double-digit territory (cf. graph 1). Lending rates are also very high in nominal terms but are more moderate in real terms. Thanks to the authorities’ efforts to consolidate the banking sector (closure of weakest banks, recapitalisation and strengthening of the legal framework), the sector has stabilised. The credit to the private sector returned to the positive territory in nominal terms (cf. graph 2) but remains negative in real terms, indicating that private-sector access to credit remains difficult.

Last but not least, exchange pressures have abated since the end of January 2018. That being said, external vulnerability remains elevated due to large external indebtedness, large repayments due, a moderate current account deficit and still-low liquidity as highlighted by the category 5 classification for the short-term political risk. In a context of rising global interest rates and ahead of the 2019 election, the exchange rate might again be under pressure. Depreciation of the hryvnia will weigh on the ability of entities to pay back their debt denominated in foreign currency and lead to an increase in public and external debt, which are partly denominated in foreign currency.

Analyst: Pascaline della Faille – p.dellafaille@credendo.com