ICU co-founder Konstantin Stetsenko is positive about the economic outlook for Ukraine

ICU Founder

Covid-19 is creating a tragedy of exceptional proportions and having a major impact on the global economy.

Konstantin Stetsenko, a Founding Partner of ICU, the leading independent asset management, private equity and investment advisory firm in Central and Eastern Europe, believes there is reason to be positive about the outlook for economic and monetary conditions in Ukraine.

The Ukrainian economy is better prepared to weather the current economic crisis than previous ones

KS: The recent data has confirmed our assumption that Ukrainian economy has passed the bottom of the trough in April and has started a slow recovery in May. The easing of quarantine restrictions on May 11 had the biggest impact on retail trade, as sales of non-essential goods in shopping malls and work in food markets resumed. The industry performance has also improved slightly. As a result, we estimate the decline in GDP to slow to 10% YoY in May from 13% YoY in April.

During the first half of June, the easing of quarantine restrictions accelerated significantly both in Ukraine and around the world. Business activity is gradually recovering, as evidenced in particular by various high-frequency indicators. For example, according to the website, 86% of restaurants and cafes have resumed operations in recent weeks compared to only 32—35% in April, and that share increased to 69% in May. At the same time, the revenue derived from this sector was only 76% of the pre-quarantine level.

However, “unfreezing the economy” is still heavily confined by the restrictions on public transportation and remaining social-distancing measures. As a result, we expect the decline in GDP to be around 10% YoY in 2Q20.

Expect a gradual recovery ahead

KS: Combining the effects from the supply and demand sides, we see ahead an economic recovery pattern more like the Nike swoosh. We see a dramatic surge once the lockdown ends, but then the boost fading in 2H20, as the GDP quite slowly resumes towards a pre-pandemic trajectory. We expect, that the real GDP falls by 6.7% in 2020 with growth restored by 5.7% in 2021.

In 2020, contraction in domestic demand leads the economic downturn. At the same time, we expect an increase in investments in medicine and pharmaceuticals, IT, the organization of remote work, automation, and robotics. Some additional demand will be generated by the agro-sector factoring in solid revenues this year and accumulated funds for land purchase as the launch of a full-fledged land market is delayed. Continuation of government infrastructure projects will provide additional support.

The rise in unemployment will be relatively moderate

KS: The position of the labor market is changing dramatically because of the COVID-19 crisis. Labour shortages and fast wage growth switched to labour excesses and wage cuts. During the lockdown, many workers were fired. Not all of them will be able to find a job after the economy is reopened due to prolonged demand destruction and companies’ changing business models. In addition, a number of individual entrepreneurs may become unemployed as they will not be able to reopen their businesses post-lockdown.

We do not expect that the government’s programmes to increase employment will be successful since their plans account for already existing jobs that are low paid. At the same time, Ukrainian companies frequently prefer to put employees on unpaid leave or decrease the number of working days instead of laying off. Therefore, we project that growth of unemployment will not be as dramatic as in other countries.

National Bank of Ukraine (NBU) will cut rate to 5.5% by the end of 2020, below current expectations

KS: The NBU will follow a more dovish path as inflation proves to be lower and the hit to demand greater than projected in April. We expect consumer inflation to remain subdued at 2-3% year on year (YoY) until Q4 2020.

We project that the anaemic growth of prices and depressed demand will push the NBU to continue its easing cycle and lower the key policy rate to 5.5% by September, compared with its latest forecast of 7% in 2H20-2021. With anticipated UAH weakening and a recovery of energy prices, the NBU will keep the rate on hold in Q4 2020. Then, through 2021, the central bank will gradually raise the policy rate to 6.5%, reacting to recovering demand and inflationary pressures.

Inflation will rise gradually, and the NBU will stay dovish

KS: End-year CPI of 4.2% in 2020 and 5.3% in 2021 will allow the NBU to continue easing monetary policy and to use liquidity-providing instruments if necessary. Banks will support creditworthy borrowers, but we do not expect a significant increase in lending due to the prudent behavior of banks and a dearth of reliable borrowers.

Bond yields and bank rates on deposits and loans will follow the NBU rate

KS: During the last few years, bond yields were highly dependent on the NBU key policy rate, with some deviations mainly caused by foreigners’ inflows into the local bond market. With a decline in foreign demand for government debt, the Ministry of Finance had to propose an additional premium to the key rate.  We do not anticipate that foreign investors will change their view soon. At least until autumn, we expect to see a steady outflow of foreign funds from local-currency bills. Without demand from abroad, the Ministry of Finance will have to continue paying a premium to the NBU key rate. This premium will be in the range of 200–300bp throughout the summer. Therefore, interest rates in the primary bond market will continue to follow the NBU key policy rate.

Bank deposits are mostly unaffected by pandemic

KS: The pandemic had little effect on bank deposits; after a short and moderate outflow, deposits recovered. Retail deposits lost 0.5% MoM in March net of the FX effect, but grew again in April by 2.7% MoM. Deposits without early withdrawal have been around for less than five years but proved to be effective against bank runs. Banks are unlikely to engage in price competition for deposits since they would like to avoid a deep fall of net interest margin as their balance sheets shrink due to lower lending.

About Konstantin Stetsenko

Konstantin Stetsenko is one of the Founding Partners of ICU and has been instrumental in building an experienced, professional and industry-recognized team that has established ICU as the leading independent asset management, private equity and investment advisory firm in Central and Eastern Europe. Described as one of Ukraine’s best traders, Konstantin has been pivotal in rolling out the asset management and fixed income trading businesses.

ICU’s investment team has significant experience in private equity & venture capital, brokerage & asset management, high yield corporate debt, distressed debt, restructurings and other special situations across a number of emerging markets and aim to provide their clients with superior risk-adjusted returns across a number of asset classes.