Wednesday, February 26, 2014

Ukraine's Financial Viability In The Midst Of Instability

Ukraine is in a tough spot.  Changing a government's top leaders under conditions of duress is never easy.  Regional divisions along ethnic lines make things obviously more complicated.  The international community stands ready to help keep Ukraine stable.  Let's examine the price of stability.

The World Bank reports that Ukraine's GDP was US$176.3B in 2012.  That's little more than 1% of the US's GDP.  This is a poor country.  The one other World Bank statistic I think is most relevant is Ukraine's current account deficit of -8.1% of GDP in 2013.  I'd need a 2013 GDP figure to make an apples-to-apples estimate of how big that deficit was last year.  The best I can do is review the IMF's first Post Program Monitoring Review for Ukraine dated December 19, 2013, which concluded that Ukraine's economy is under severe stress.

Transparency International ranks Ukraine 144th out of 175 in its Corruption Perceptions Index. That's really bad.  The Heritage Foundation ranks Ukraine 155th out of 178 in its Index of Economic Freedom.  That's really bad, once again.  Throwing relief money into the Ukrainian economy without serious structural reforms along the IMF's guidelines will be a waste of effort.  I believe the finance ministers of the G20 and other global bodies know this and will push for reforms along with their aid packages.

Here's a Cbonds snapshot of Ukraine's macro-level credit status in real time.  Its yield curve is inverted; in the US economy that is usually a sign of an imminent recession.  Contrast that with the prime borrowing rate, which absolutely explodes from single digits to over 20% in less than a month.  Lenders are seriously bidding up the price of capital in Ukraine.  Look at how the US dollar (USD) is appreciating against the Ukrainian hryvnia (UAH); that currency is at a 10-year low.  Any relief package from the US, the EU, and/or Russia needs to move fast to keep this economy on life support.  Reuters reports that Ukraine's foreign reserves have dropped to US$15B.  Contrast this with the IMF's data showing reserves of $20B in December 2013.  The National Bank of Ukraine appears to report currency exchange and interest rate numbers consistent with the open-source data I located above.  Good for them.

The world faces a tough choice in helping Ukraine.  The country is obviously in dire straits and needs foreign cash now to stop the bleeding.  Its governance is so weak that much aid will be wasted unless international monitors are on hand to directly supervise the country's financial management.  I hope the Ukrainian government's finance folks are used to working long hours and weekends.  They'll be busy making sure any aid the country receives is spent well.