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What will happen to the economy after the coronavirus crisis?

24/ 03/ 2020

Today, Ukraine faces a real challenge – how to introduce effective anti-epidemic measures to curb COVID-19 with minimal negative effects on the country’s economy. The restrictive measures are already affecting the work of businesses, government agencies, and institutions, as well as the daily lives of millions of people.

Yesterday, March 23, the European Business Association held an online meeting COVID-19: Business vs Force Majeure, during which СEOs of companies, representatives of international financial institutions and the real sector shared their views on the coronavirus situation and discussed changes in business operations, possible consequences, and threats, ways to fast recovery after the crisis and the search for new opportunities.

View the meeting online on Facebook

The following EBA Board Members joined the discussion – Tomas Fiala, CEO Dragon Capital, Tiberiu Dima, CEO BASF, Oleksandr Pysaruk, СЕО Raiffeisen Bank Aval, Olena Voloshyna, Head of International Finance Corporation (IFC) Operations in Ukraine, Maciej Tomasz Zielinski, CEO Siemens Ukraine, Saida Djarbolova, Country Head of ING Bank Ukraine, as well as Vladyslav Rashkovan, Alternate Executive Director of IMF and Yuliia Kovaliv, Deputy Head of the Office of the President of Ukraine.

On economic forecasts

The updated basic forecast by Dragon Capital for 2020 predicts a 4% decline in GDP and devaluation of the hryvnia to 30 UAH / $ (at the end of the year) – in case the quarantine measures continue until May (the average rate is expected to be 29 UAH / $, that means the devaluation of about 11% to last year’s rate). According to a less optimistic forecast, if quarantine is extended for a longer period, the GDP may decrease by 9% and the hryvnia will fall to 35 UAH / $. Furthermore, unemployment is expected to rise in such circumstances.

It is worth noting that Ukraine is ready for a possible crisis better than in 2008 or 2014 – this was the opinion of the participants of the discussion. Thus, for example, the current account deficit of the balance of payments is substantially lower (last year the deficit was lower than 3% of GDP, and in 2008 it was 8%). Exports are dominated by soft commodities (agricultural products), which amount to 40%, in 2008 it was 12%, and the fall in consumption of these products or their prices is not expected.

At the same time, it should be mentioned that the country does not have enough strength to smoothly overcome the situation. Moreover, if we had previously experienced the financial crisis, now it is somewhat different. There is a workforce crisis, a great impact of the emotional and psychological component and the need to act for a lasting time under uncertainty.

On cooperation with international institutions

Therefore, it is critically important for Ukraine to continue its cooperation with the IMF and other international institutions in order to refinance current debt and finance the budget deficit. Thus, now 2 conditions remain to be fulfilled – to pass a law on the impossibility to return banks (nationalized or liquidated) to ex-owners and the law on the land market. The program agreed with the IMF in December, provides financial support of $ 5.5 billion, but now it needs to be increased almost by 2 times, to a minimum of $ 10 billion and at least half of the money received this year will go to the budget rather than to reserves of the NBU. In addition, cooperation with other international partners is also important. Thus, Ukraine should receive $ 1 billion from the World Bank and half a billion euros from the EU.

At the same time, the World Bank has recently decided to allocate a $ 14 billion package, including $ 8 billion to support clients of the International Finance Corporation ($ 2 billion to support existing clients, the real sector (industry, etc.), export financing, circulating capital and new products to support international trade). These funds will be available under a simplified procedure. There are also negotiations on receiving funds from the EBRD and the European Commission to support the budget and to finance the fight against the coronavirus.

At the same time, it is very important to understand now that the default is not a solution for the Ukrainian economy, even discussions and speculation about it are damaging. The default announcement will undermine the confidence of international partners and block access to new loans for many years to come. The default may lead not only to inflation, but to hyperinflation, and so on. Therefore, all the speakers unanimously emphasize that the default is definitely not the way out, so any talks about it should be stopped.

On the banking market

We can say for now that the banking system is stable – there is enough capital and liquidity. Last year, banks showed a return on equity of around 30%. It does not worth imposing restrictions on the foreign exchange market for this moment, and there is no need for this either. The biggest challenge for banks in the current situation is to ensure the continuity of customer service while maintaining employee health, which is a key priority. It should be mentioned that the smooth cooperation and regular communication between banks and the regulator are very important now.

On the real sector

The business is quickly adapting to the new realities and working conditions in the country. Thus, most employees are working remotely, business trips are canceled, communication switches to online mode. At the same time, companies are trying to arrange secure transportation for those employees who are required to go to work, given the specifics of their jobs. Also, the offices and premises are mandatorily disinfected.

Company directors say unanimously that they will consider the salary cut and personnel reduction as a last resort. And when asked about what companies would do in the case of the quarantine extension, most participants answered that they would look for new niches to develop their business.

On the consequences and opportunities

The question of how effectively Ukraine and other countries in the world can overcome the economic consequences of the coronavirus also depends to a large extent on the changes in consumer behavior and responses of global leaders.

In fact, it is already clear that the consequences of the strict restrictive measures will anyway affect most enterprises in Ukraine. Small businesses and businesses whose activities are related to the physical presence of customers, services, etc. will come off worst. Therefore, it is important now for business to prepare itself for all possible scenarios and minimize the negative consequences which vary greatly among company sectors.

At the same time, the business expects the government to communicate promptly on all the steps that are being taken, objectively analyze strict quarantine measures and their effectiveness, gradually remove the restrictions and recover economic activity.

Surely, Ukraine, like other emerging economies, will have a rather difficult time in case of the prolongation of the strict quarantine. However, we can unite in difficult times and come to mutual assistance better than anyone and will look for new opportunities for growth even in times of crisis.

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