Friday, February 28, 2014

The Economic Crisis in Ukraine

With Ukraine being in the news on a daily basis over the past few weeks, I wanted to post a summary of key points about the nation's economy, particularly since very few of us have any deep knowledge of the country.

Ukraine has a population of 45.59 million people (2012) and is considered a lower middle income nation by the World Bank.  The nation is composed of two main ethnic groups; Russians who comprise around 17 percent of the population and Ukrainians who comprise 78 percent of the population.  Life expectancy at birth is 71 years, up slightly from 68 in 2004.

Economic growth has been a problem for Ukraine, particularly since the Great Recession.  Here is a graph showing GDP in billions of current United States dollars:


Between 2004 and 2009, Ukraine's economy grew by between 2 and 12 percent.  When the Great Recession hit, the economy shrank by 15 percent in 2009, rising 4 percent in 2010 and 5 percent in 2011.  Unfortunately, 2012 saw growth of only 0.2 percent, a scenario that continued in 2013 as shown on this graph:


The World Bank projects economic growth of 2.0 percent in 2014, 1.0 percent in 2015 and 0.7 percent in 2016.  

Ukraine's current account balance is in very poor shape.  Current account balance is defined as the difference between what a country has in savings and what it invests.  It is the sums of the value of imported goods and services plus net returns on investments held abroad minus the value of exports of goods and services.  When a current account balance is negative, it means that nation has more of its economy financed by foreign nations and investors.  Here is a graph showing the trend in Ukraine's current account balance compared to its European and Central Asian peers:


Ukraine's current account balance as a percentage of GDP fell from -2.2 percent in 2010 to -8.4 percent in 2012, rising very slightly to -8.1 percent in 2013.

According to the CIA World Factbook, Ukraine has one of the world's largest current account deficits when measured in dollar terms, coming in 181st place in a 193 nation ranking with an estimated deficit of $11.92 billion in 2013.  Which nation has the world's largest current account deficit?  The United States with a deficit of $360.7 billion in 2013 although, on the upside, it is a rather small percentage of GDP, coming it at around -2.2 percent in the third quarter of 2013.

Now, let's look at Ukraine's debt.  Here is a graph showing what has happened to Ukraine's government debt-to-GDP since 2000:


Fitch estimates that Ukraine's debt-to-GDP could be around 48 percent by the end of 2014 due to the growing government deficit, weak economic growth and the devaluation of the hyrvnia.  According to the Ukraine News Agency, data from the nation's central bank shows that Ukraine's total state debt grew by 13 percent or $8.434 billion in 2013 to $73.078 billion with growth of $4.247 billion in December 2013 alone.  In 2014, Ukraine will have to repay $8.2 billion on the foreign state debt which exceeds one-third of the National Bank's reserves.  Foreign reserves held by Ukraine's central bank dropped by 16.9 percent or $4.1 billion in 2013 and an additional 12.8 percent in the month of January 2014 alone.  As a result, Fitch has lowered Ukrainian debt to a pre-default level of CCC.

Now, let's focus on the portion of Ukraine's debt that is owed to the World Bank.  Here is a graph showing the size of the World Bank's International Bank for Reconstruction and Development (IBRD) loans to Ukraine:


Of the total of nearly $5.807 billion in loans, $4.454 billion has been disbursed and $903 million has not been disbursed.  Over the past two decades, loans were made for a wide variety of projects including housing, water projection, hydropower rehabilitation, urban infrastructure and road improvements.  A substantial number of the loans mature in 2014, fortunately most of the loans have an interest rate that is well under 1 percent with many of them being interest-free as shown on this chart:


Ukraine's total current obligation to the World Bank is $3.314 billion.  Many of these loans are in U.S. dollars which will make it more difficult for Ukraine to pay back since its currency has plunged in value as shown here:


Ukraine is just in the initial phase of its economic crisis which has been brought to the forefront now that the nation is in geopolitical no-man's-land.  Once again, it looks like the IMF will force itself into the fray, bailing out yet another debtor nation in a desperate attempt to stave off another world economic crisis just like they did for Greece.

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