Renaissance Capital warns against excessive enthusiasm for Ukraine post elections

Following the parliamentary elections in Ukraine on Sunday, Renaissance Capital warns against excessive market enthusiasm for a speedy re-engagement with the IMF.

Prior to the election, the firm warned against assuming the new Ukrainian government will “do the right things to deserve a tap on the back from the global lender.” Now the preliminary results have been announced, the firm feels even stronger about this.

Ivan Tchakarov (pitured), chief economist for Russia and CIS, writes: “The indications are that the Party of Regions will be able to reach simple majority in the Parliament with the Communist Party and form a government with them. This combination does not seem too encouraging and hardly calls for a drastic change in policy course.

“We feel that the government will continue to hold off for as long as possible before going to the IMF and we see good chances that Ukraine opts for its own pace of reform focused on sustained medium-term efforts to reduce dependence on imported Russian gas.”

Tchakarov maintains these elections are “not the ones that matter and they may not be as transformational for the IMF deal as commonly perceived.”

He believes the current elections should be viewed more as a “dress rehearsal” for the 2015 presidential election, especially in the light of the constitutional changes that have taken place since last year, which have transferred significant powers back to the president.

“While macroeconomic pressures have indeed become more pronounced, we don’t see significant drivers for the government to raise gas/utility prices and/or allow a non-trivial currency weakening at least until mid-2013. In any case, our estimates suggest that the hryvnia [local currency] is not grossly mispriced relative to fundamentals,” Tchakarov writes.

In terms of GDP growth in the country, Renaissance’s outlook for the year is hardly positive for this year. However, it expects growth to accelerate to around 2-3% next year, which will only “blunt Ukraine’s incentives to return to the IMF”.

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