Abstract
1. This statement provides information that has become available since the staff report for the Article IV consultation and the first Post-Program Monitoring was circulated to the Executive Board. This information does not alter the thrust of the staff appraisal.
1. This statement provides information that has become available since the staff report for the Article IV consultation and the first Post-Program Monitoring was circulated to the Executive Board. This information does not alter the thrust of the staff appraisal.
2. Recent macroeconomic data came broadly in line with staff projections. Gross output in agriculture expanded by 43 percent y-o-y in October, supporting expectations that the economy may be gradually emerging out of the recession. The pace of decline in industrial production slowed as well, to -4.9 percent y-o-y from -5.6 percent in September. However, the state-owned energy company Naftogaz continued to accumulate liabilities to Gazprom for unpaid gas imports (about US$2 billion as of end-November), the settlement of which the authorities are seeking to defer to 2014.
3. The decision not to sign the Association Agreement with the EU last month led to mass protests and a political crisis which persists, despite the government’s survival of a no-confidence vote on December 3. The authorities reaffirmed their aspiration for EU integration, and a Ukrainian delegation is going to Brussels to discuss aspects of the implementation of the association and free trade agreement with the EU. At the same time, the authorities have been reportedly seeking external financing from Russia and China. Under the current circumstances, the content of the 2014 budget and the timing of its adoption remain uncertain.
4. Markets have reacted negatively to the recent events with Ukraine’s Eurobond yields and CDS spreads widening sharply to multi-year highs. The National Bank of Ukraine (NBU) gross reserves declined to US$18.8 billion at end-November (about 2.2 months of import coverage). So far, the exchange rate has remained broadly stable, supported by NBU interventions, and the commercial banks report only a small uptick in household deposit withdrawals. However, the demand-supply imbalance in the foreign exchange market persists, raising the risk of market-forced exchange rate adjustment in case of intensified pressures.