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MENAFN - AFP - 04/11/2012

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(MENAFN - AFP) Ukraine's parliamentary elections may have passed without unrest but the country is facing a spell of economic trouble that may include a devaluation of its currency and a new recession.

Reliant on Russia for its energy needs and paying Moscow around a billion dollars a month in gas bills, Ukraine is increasingly using debt markets for its financing as the current account deficit grows ever wider.

Meanwhile, the global economic downturn is again exposing Ukraine's dangerous dependence on exports of steel, a highly cyclical commodity which is now suffering a slump in demand.

The country remains scarred by the experience of the 2008-2009 economic crisis when its gross domestic product (GDP) fell by 15 percent, the currency fell by 60 percent in value and fears resurfaced about the creditworthiness of the strategic state that bridges the European Union and Russia.

The Regions Party of President Viktor Yanukovych appears set to have a wafer-thin majority in parliament after the elections but even with this analysts question his stomach to implement unpopular economic reforms.

While growth was 5.2 percent in 2011 and 2.5 percent in the first half of 2012 in annualised terms, GDP contracted 1.2 percent in third quarter this year and some banks fear the country will see zero growth for 2012.

Meanwhile, the current account deficit is set to put further pressure on the embattled currency the hryvnia, with rumours of a devaluation already prompting Ukrainians in September to buy up dollars and euros.

"Ukraine's gaping current account deficit -- over 6 percent in the first half -- and large external debt obligations mean that currency devaluation still looks inevitable," said analyst Liza Ermolenko of Capital Economics.

She added in a note to clients: "Worryingly, it looks like the economy is already on the brink of slipping into recession even without a re-escalation of the euro crisis."

Analysts at Fitch Ratings described Ukraine's external financing gap as "precarious", with pressure on the exchange rate increasing due to domestic demand for foreign currency rising and forex reserves falling.

Ukraine was helped out of the last crisis by a 15.3 billion IMF standby credit package. Kiev has received 3.4 billion in two disbursements but since December 2010 the credit has been frozen partly due to the unwillingness of the Yanukovych government to implement reform.

But with external financing needs projected to grow in 2013 -- not least because of repayments to the IMF itself -- analysts believe the government will have to call on the world lender again.

"Getting the IMF deal back on track would reduce refinancing risk, boost investor confidence and so underpin continuing market access," Fitch Ratings said.

"It would also force the government to resume fiscal consolidation and address underlying structural economic and financial weaknesses."

Olena Bilan of Dragon Capital in Kiev said that Ukraine's cooperation with the IMF was "very important" as it would need disbursements of 9 billion in the year ahead to finance its domestic debts and foreign obligations in foreign currency debt.

The gloomy macroeconomic situation meanwhile comes against a tense political situation, with Yanukovych largely shunned by the European Union over the jailing of his rival, former opposition leader and ex-premier Yulia Tymoshenko.

Despite successfully co-hosting the Euro 2012 football championship with Poland, Yanukovych's government has failed to make crucial reforms like raising consumer gas prices, improving the business climate or limiting corruption.

The World Bank's Doing Business index for 2013 puts Ukraine in a miserable 137th place -- a slight improvement from 2012 but still behind the likes of Cambodia and Brazil and with a measly per capita national income of 3,120.

Igor Mazepa, owner of investment house Concorde Capital, described the business climate as the worst in Ukraine "in the last 20 years" with the authorities "putting huge pressure" on companies to settle taxes in advance to relieve the budget.


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