Ukraine’s 2019 elections are likely to result in a change in president, as incumbent Petro Poroshenko has struggled to gain voter support. Ukraine will continue to be afflicted by conflict in the 12-month outlook, while instability will also drive terrorism risks. The country faces significant debt repayment obligations in 2019, but continued IMF engagement should moderate sovereign credit risks.
President Petro Poroshenko will struggle to retain his position in 2019’s presidential election, having polled around 10-11% on average between January and August 2018. Poroshenko has struggled to gain voter support, despite doubling the minimum wage in 2017. While the election result is far from certain, opposition candidate Yulia Tymoshenko has been polling well in recent months, and would be most likely to win the first round election. However, she may struggle to defeat political newcomers such as pop star Svyatoslav Vakarchuk.
On 11 November 2018, the separatist Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR) held elections for their regional assemblies. The European Union, Ukrainian government and OSCE all denounced the elections as illegal, suggesting that they breached terms of the Minsk II ceasefire agreement.
Russia is expected to recognise the election results, reducing the likelihood of any substantive progress on peace talks in the one-year outlook and ensuring that violent incidents continue along the line of contact in eastern Ukraine for the foreseeable future.
Relations between Ukraine and Russia deteriorated further in November 2018, when 3 Ukrainian naval vessels were seized by Russian border patrol vessel in the Kerch Strait. In response, Ukraine introduced martial law for 30 days in 10 regions. This latest Ukrainian-Russian confrontation increases the likelihood of miscalculation, making further incidents possibles. There is also likely to be disruption to cargo movements in the near-term outlook, and further sanctions on Russia may be introduced.
Sovereign credit risks in Ukraine are tied to International Monetary Fund (IMF) engagement. Ukrainian Eurobond yields increased over 2018, as delays to IMF disbursals spurred investor concerns. No payments have been made by the IMF since 2017, after Ukraine refused to increase gas tariffs.
Ukraine’s debt repayment burden in 2019 is elevated at USD 11.76 billion, and the IMF will be a critical source of foreign exchange and investor confidence under the structural reform agenda. Investors should be reassured by the signing of a new IMF package in October 2018.
The USD 3.9 billion 14-month programme will replace the Extended Fund Facility due to expire in March 2019, and should ensure that Ukraine is able to meet its payment obligations.
Ukraine has emerged from its deep 2014-2016 recession, but the recovery will remain lacklustre as the separatist conflict persists and structural reforms are implemented slowly. Real GDP growth is forecasted at 2.9% in 2019, and growth will be driven by household consumption, which grew by 5.6% y-o-y in Q1 2018. Investment in mining and quarrying should also support economic activity, as the impact of the Donbass trade blockade recedes and exports rebound.
Ukraine’s economic outlook will be exposed to the outcome of the election, particularly whether the next government maintains engagement with the IMF. Tymoshenko has criticised the current government’s structural reforms under the IMF programme, while her Fatherland party would be likely to pursue a more populist policy agenda in government, generating downside economic risks.
Ukraine’s power sector will experience slow growth in the coming years, as structural reforms to the sector progress slowly.
Power generation growth is forecasted to average 0.3% annually in the next decade. The government is keen to diversify the power mix in order to reduce reliance on coal and gas imports, which are vulnerable to disruption. A new electricity market law was introduced in 2017, aligning market regulation with the Energy Community Treaty and proposing the introduction of a fully liberalised electricity market by July 2019.
However, this may not be fully realised, particularly if elections cause a change of government. Market reform is opposed by many, particularly the general public who fear price hikes. A change in government would also elevate contract alteration risks, given the extensive participation of politicians in commercial activities. A Tymoshenko government may review contracts signed under the current Poroshenko administration.
*** The location of the asset is particularly important in pricing
† Due to tensions between Russia and Ukraine, a number of markets are unwilling to write these risks
†† Pricing would be c. 0.2% p.a. in the east of Ukraine
††† Cover is unlikely to be available in the east of Ukraine
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Indonesia, Ukraine and Thailand all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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