Coronavirus and the economy of Ukraine. Turn on the machine or wait for the IMF?

Does the government have mechanisms to deal with the negative impact of coronavirus

Коронавирус и экономика Украины. Включат станок или дождутся помощи МВФ?

The government produces a lot of practical information concerning restrictive measures in connection with the quarantine rules and individual safety of citizens. This is important to prevent panic. But the new government is still not coming any intelligible signals and Analytics on how Ukraine will overcome the negative effects of the virus on the economy of the country.

Does the government have mechanisms to deal with the negative impact of coronavirus – analyze “Westie”.

Black Swan is on the rise

The Department dimension financial Corporation Moody’s Corporation believe that the epidemic of the coronavirus can be a “black Swan” by 2020, and extremely negative impact on the dynamics of the world economy. The main destabilizing factor on the economy is the rate of spread of the virus and unpredictability.

In contrast to the collapse of the mortgage market in the United States, no one predicted the emergence in the early 2020 potentially devastating pandemic, “—analysts say.

In this regard, Moody’s already questioned the growth forecast for world GDP this year, which was estimated at a very modest 3.3 percent.

More pessimistic analysts of the investment giant JPMorgan. There predict that the US economy and the EU by the summer may be faced with significant recession. Based on data from the who about the spread of coronavirus in JPMorgan believe that the US GDP could fall by 2% in the first quarter and 3% in the second. The Eurozone economy after two quarters, will shrink by 1.8% and 3.3% respectively. Economists believe that the current situation could lead to a global recession, and in the case of improvement of the situation with coronavirus, the upturn in the economy can be expected by mid-2020.

With the beginning of the year Ukraine’s economy is already showing a very negative trend. According to the Department of strategic planning and macroeconomic forecasting Ministry of economic development in January, Ukraine’s real GDP decreased by 0.5%. All the main indicators of economic activities, except construction and trade, left in a noticeable minus. It is noteworthy that on 0,7% has decreased even in the index of agricultural production. And that’s not the full impact of coronavirus on the situation. But it is quite specific inertial momentum of economic “heritage”, which left a retired government “reformers” Alexey Goncharuk.

Recently, the trade representative of Ukraine Taras Kachka said that by the end of February we can expect a decline of GDP by more than 0.5%. “While I can say that there are many positive and negative factors. Therefore I do not exclude that GDP could be negative, even worse than the decline of 0.5%, “—commented on the preliminary analysis of the GDP for February is Pitching.

The main negative trend is the rampant slowdown in industrial production. In January, the industry dipped by 5.1%. The negative trend has slowed somewhat in comparison with the end of last year, when industrial production fell in November by 7.5% in December to 7.7%. In total, the industry shows decline for 8 consecutive months. This testifies to the deep crisis processes in the economy, even in spite of last year’s reports on GDP growth.

The vulnerability of critically weak system

Negative factors of influence on the Ukrainian economy can be divided into external and internal contours.

To external trends is the pressure on the domestic economic situation and the instability in the foreign markets. At risk were the basic export positions and directions of Ukraine. First and foremost, this is due to the Chinese direction. Last year, the largest buyer of domestic products was China. Because of the coronavirus, a significant part of Chinese industry is still on vacation. On the return to pre-crisis rates of economic activity of China so far. This can have a negative impact on the export of Ukrainian goods.

Based on the data of the state statistics, we also noted that almost 26% of Ukrainian exports of agricultural products, but rather the segment of plant products (mainly cereals). Recent reports from the commodity markets is very disappointing. Food and agriculture organization of the UN (FAO) noted the decline in price indices of food products.

It is also necessary to add the reduction of the currency inflow to Ukraine from migrant workers. This is due to the slowdown in economic activity due to a virus in the countries where our workers and the Exodus of Ukrainians home from endemic regions.

Critically important is the issue of granting Ukraine a new loan from the IMF. At the last location of the Ministry of Finance of t-bills, managed to attract just 1.1 hryvnia bonds with annual maturity. This clearly shows that government bonds can no longer be sufficient budget for “maintenance of trousers”.

This dynamic reflects the global trends of capital flight from the potential areas of turbulence. According to the newspaper Financial Times, foreign investors from the end of January brought from the markets of shares and bonds of developing countries 41.7 billion dollars. This was the result of the reaction of the world stock exchanges at the outbreak of the coronavirus. These trends are already significantly affect the hryvnia.

With regard to internal factors of influence on the economy, they are associated with restrictive measures of quarantine and other events. While the quarantine was imposed just two weeks. It is possible that circumstances will require it to continue the action. In this regard, may be significantly affected business activity, primarily in the segment of small and medium business services.

The Minister of health Ilya Yemets proposed to restrict the operation of catering establishments on the territory of Ukraine. In Lviv and Odessa, the local authorities have already announced decisions to limit the work of all the cultural, recreational and sports facilities (cinemas, museums, children’s clubs, playgrounds, gyms, swimming pools) and institutions of all forms of ownership and subordination, with the number of employees more than 10 people. Prime Minister Denis Shmigel, to prevent the spread of coronavirus, called on Ukrainians to refrain from trips between cities. On March 17, “Ukrzaliznytsia” announced the suspension of international passenger traffic.

Given that in January the index of the transport sector showed a 20.7%, restrictive measures may further exacerbate the negative trends. Also can go to the index of retail turnover, which in January showed an increase by 12.1% and became almost the only positive indicator on the background of the General failure of numbers of the beginning of the year.

The machine will run?

If all the challenges and negative economic factors for the domestic economy are clear, that with the government’s response to the challenges is not clear anything.

China, for example, due to the outbreak of coronavirus, and caused by a quarantine of difficulties, decided to support small and medium business tax incentives and additional state orders. There are exempted from the individual income tax medical supplies and drugs that are purchased on a cashless basis and issued to employees in institutions and social organization. Also exempt from VAT logistics and courier company, providing delivery to citizens essential goods. Tax breaks will also apply to companies in transport, tourism, hotel and restaurant business who suffer losses due to the outbreak of coronavirus.

In the United States has announced an ambitious plan for the introduction of tax holidays. President Donald trump has offered to reduce to 0% contributions to social insurance and healthcare to workers and employers. Also planned for three months to defer tax payments for small and medium businesses.

The UK Treasury announced a plan to stimulate the economy in response to the crisis. The measures include lowering taxes and encouraging small business lending at low interest rates. Similar measures exist in other countries.

About such events in the Ukrainian realities, speech does not go yet. The Cabinet has not developed a policy support for economic development and comprehensive measures to prevent negative impact in connection with the virus.

However, the government has no sufficient financial reserves for the introduction of such incentive mechanisms. Now we are talking, rather, about the current patching budget holes and deadlines of payments on external loan obligations.

Apparently, the Cabinet has no other mechanisms available to mitigate the crisis consequences, than to deal with them by printing money. This way has its negative consequences and additional features. In this scenario, we can expect accelerating inflation. According to state statistics, in February the inflation rate was 2.4% compared to the same period last year. Fairly low inflation rates provide a corridor of opportunity for its dispersal through the issue within reasonable limits.

But in this scenario there is another important factor – the opinion of such tactics of the IMF, which for such instruments it is unlikely that “Pat on the head.” And this, recall, is directly associated with the opening of new credit line for Ukraine — now this is very important for the government.