Wednesday, August 27, 2014

Financial Comment - Ukraine debt rating hits new low

Ukrainian economy in dire straits

The war in the Donbas is delivering a double whammy to the Ukrainian economy. It is causing direct harm by murdering people and ruining industry and infrastructure, and it is also slowing down the economy in unaffected areas and putting off potential investors.

Ukraine’s economy was not doing well even before the war, when it already was officially in recession due to mismanagement by the Yanukovych regime. Now, the decline of the economy is deepening: Ukraine’s GDP dropped by 1.1% in annual terms in the first quarter of 2014 and by 4.7% in the second quarter. The industrial output declined by 4.7% in the first quarter and by 5.8% in the first seven months of 2014. Capital expenditures in the economy dropped by 17.5% year over year in the first six months of 2014.These devastating numbers are not surprising given that the annexed Crimea used to account for almost 4% of Ukraine’s GDP, while the Donbas used to contribute up to 20%.

The financial sector is also feeling the pain: the Ukrainian hryvnia (UAH) posted a record low against the US dollar on Tuesday at 14.30 UAH to 1.00 USD, while the rating agency Fitch downgraded Ukraine’s long-term domestic debt from B- to CCC, which is in the highly speculative territory. The country’s foreign debt is also rated CCC.

At the same time, although Russia is losing the economic fight to the West, the sanctions are not having an immediate devastating effect upon the Russian economy. This is increasingly looking as a war of attrition where Russia hopes to exhaust Ukraine before the sanctions give effect. Despite the hardships, Ukrainians are not complaining because they understand that the country’s destiny is being decided on the battlefield. It seems that, in this war, Ukraine must rely mostly on its own resolve.

By: Ukrainian Credit Union Limited

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