World Economy

This country's economy may shrink by 10% in 2015


Ukraine may have dropped out of the headlines but its economic troubles are worsening as it continues to battle with separatists—and bondholders.

The country's economy is seen shrinking by a steep 5.5 percent this year by the International Monetary Fund (IMF). However, this could prove optimistic—Exotix, a merchant bank specializing in emerging markets, sees Ukrainian gross domestic product (GDP) shrinking by nearly 10 percent in 2015.

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"Ukraine is now fighting on two fronts, in the East with the separatists and now with the bondholders in the context of discussions on restructuring the sovereign and state-owned bank debt," said Jakob Christensen, senior economist at Exotix, in a research note on Thursday.

On Friday, the European Commission signed off on 1.8 billion euros ($2.0 billion) of extra financing for Ukraine, after the Ukrainian government sought the right from its parliament this week to suspend foreign debt payments.

"If the moratorium is imposed, it would be a default event according to the bond documentation, which would be quite messy for both sides," said Christensen.

He added that the negotiations posed downside risks to bond prices and that Exotix had downgraded its recommendation on the debt to "sell" from "hold" as a result.

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In addition to aid from Europe, Ukraine has received a $17.5 billion bailout from the IMF. This program is due for review next month, by which point the country is expected to have restructured its debt burden to make savings of around $15 billion. However, the review may be delayed as Ukraine insists that such savings cannot be reached without a haircut to the principal (the amount borrowed that remains unpaid)—an argument that bondholders reject.

Plant shelled; deaths reported

The ongoing conflict with pro-Russian rebels in eastern Ukraine saw one civilian killed on Friday, after a major coke plant owned by Ukrainian steel company Metinvest was shelled. Plus, the military in Kiev reported that three Ukrainian servicemen had been killed and 12 wounded in the past 24 hours, according to Reuters.

Moscow continues to deny that it is backing the separatists in eastern Ukraine. However, two Russian men captured by Ukrainian forces told Russian newspaper Novaya Gazeta on Friday that they were in the country on Moscow's orders, according to Reuters.

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Meanwhile, Ukraine has also been hit by the collapse in oil prices and international sanctions on Russia, which remains its major trading partner.

In addition, Ukraine is beset by hyperinflation, with prices seen rising by 33.5 percent across 2015 by the IMF.

The country's internal political situation also remains fragile following the ouster of Ukraine's pro-Russian President Viktor Yanukovych in February 2014. Political risk consultancy Teneo Intelligence rates Ukraine as "high risk" among emerging markets for instability over the coming 12 months.

"Three countries—Venezuela, Ukraine and Yemen—are characterized as high risk due primarily to existing or potential social and military conflict," said Teneo Managing Director Wolfango Piccoli in a note on Thursday.

"The government in Kiev will likely remain cohesive in the near future because the conflict in eastern Ukraine discourages political in-fighting. However, splinter groups from individual parties have started to appear, which may challenge government stability in the first half of 2016," he added.