International ratings agency Standard & Poor’s (S&P) upgraded Ukraine’s long-term foreign currency score to B from B- on September 27 thanks to the ongoing economic recovery, despite the uncertainty hanging over Ukrainian President Volodymyr Zelenskiy’s relationship to oligarch Ihor Kolomoisky. The IMF team left Kyiv the same day and also praised the economic progress but said they remain worried about the influence of the oligarchs.

S&P said improvements in the economy and government finances mean the country should retain access to domestic and international capital markets, enabling it to meet commercial debt payments through 2020.

Almost one-third of next year’s state budget will go for servicing and repaying Ukraine's public debt, Finance Minister Oksana Markarova told the Rada last week. By the end of 2020, Ukraine’s debt to GDP ratio will fall to 46.7% and is currently falling at one of the fastest paces in the world, she said.

Ukraine’s government plans UAH141.7bn ($5.8bn) in external borrowing to finance the 2020 state budget gap, Markarova told Bloomberg News in a Facebook message. That would be up from the $4.2bn of international financing the state plans to raise in 2019, most of which it has already done.

The final amount of international borrowing may change depending on domestic issuance of debt, which has been booming this year, but was starting to slow in September as the Ministry of Finance starts offering longer maturity debt and tries to squeeze yields lower. Total borrowing including domestic sources is envisaged in the budget draft at UAH383.8bn and a deficit of 2.09% of GDP.

The draft budget is based on 3.3% GDP growth, slightly higher than the forecast for this year, but the Zelenskiy administration has been calling for reforms to lift the growth rate to 7% in the coming years.

“Ukraine’s economy continues to recover,” S&P said in a statement on September 27. Foreign-currency reserves have grown, inflation has been held below 10% and the government’s debt is declining relative to gross domestic product. “Ukraine’s new administration appears committed to preserving these gains,” S&P added.

But the economy is recovering and stable. S&P said it projects GDP growth of 3.2% this year, revised from a previous forecast of 2.5%, with average annual growth of 3% for the 2020-2022 period. It cited the “strong performance” in the second quarter, mostly on domestic demand.

However, the upbeat message from S&P, which focuses on the economics, stands in stark contrast to the political turmoil that resulted from Zelenskiy's trip to New York to participate in the UN General Assembly, where he met US President Donald Trump and got entangled in the snowballing political scandal. At the same time the honeymoon with international investors seems to be over after former National Bank of Ukraine (NBU) governor Valeriya Gontareva’s house was torched in an arson attack that she claims was carried out by Kolomoisky.

The well respected secretary of the National Security and Defence Council of Ukraine Oleksandr Danylyuk also resigned on September 27, reportedly because Zelenskiy has refused to make clear his position vis-a-vis Kolomoisky and the oligarch's attempts to either have his PrivatBank denationalised or else to receive $2bn in compensation.

Trump is in trouble after he appeared to ask Zelenskiy to interfere in the upcoming US presidential election by digging up dirt on the son of his rival Joe Biden, who worked for a Ukrainian company a few years ago. Trump appeared to be offering a quid pro quo, as earlier he withheld $250mn in military aid to Ukraine. Other reports claim that the phone call only went ahead after the Zelenskiy administration was told that it has to “play ball” with Trump.

At the same time an International Monetary Fund (IMF) team left Kyiv at the end of last week without coming to a new agreement on an Extended Fund Facility (EFF) as hoped. According to reports its main concern was also over the fate of PrivatBank and Kolomoisky’s influence on the government.

The IMF also praised Ukraine for stabialising the economy and returning to growth in the staff note issued after the team departed.

“Following the deep economic crisis of 2014-15, the Ukrainian authorities have restored macro-economic stability and growth has resumed. The economy is growing at a pace of 2½-3½%. Sound fiscal and monetary policies and exchange rate flexibility have resulted in a sharp reduction in Ukraine’s external and internal imbalances. The overall fiscal deficit has been limited to just above 2% of GDP in the last two years and is expected to remain at the same level this year,” the IMF said in its note.

And the IMF is happy as Zelenskiy has publically committed himself to keeping the reforms forced on former president Petro Poroshenko, especially in the energy sector.

“The energy sector’s quasi-fiscal deficit has been eliminated — a major accomplishment. Moreover, the current account deficit has fallen to 3-3½% of GDP and reserves have recovered to over $20bn. Decisive efforts to restructure the banking system have been critical for economic stabilisation and the resumption of growth,” the IMF said.

But despite the progress, Ukraine’s economy is still performing under potential and growth is “too slow” said the IMF. Ukraine remains one of the poorest countries in Europe, which has lead to a fifth of its labour force to leave and seek work abroad, with 2mn Ukrainians in Poland alone.

Per capita GDP (in PPP terms) in Ukraine is still very low – just 20% of the EU average, the second lowest level of all Central and Eastern European countries, according to the IMF.

Apart from the traditional problems that transistion countries have with poor infrastructure and institutions, the IMF went out of its way to highlight that Ukraine’s oligarchs are also a specific and significant problem – although the staff note did not mention Kolomoisky by name.

“Growth is held back by a weak business environment – with shortcomings in the legal framework, pervasive corruption, and large parts of the economy dominated by inefficient state-owned enterprises or by oligarchs – deterring competition and investment,” the IMF said. “A regional comparison shows that the most significant differences in reform progress between Ukraine and its neighbours are in the quality of the legal institutional framework. While there has been progress in setting up new institutions to fight corruption, tangible results have yet to be achieved.”

The poor business climate has hampered inbound investment and that means labour productivity remains low; Ukraine’s productivity is less than 10% of the EU average, according to the IMF.

The IMF note was generally upbeat and said a lot had been done already and that it was impressed with the hectic legislative programme the government had set itself that includes introducing or enacting more than 500 pieces of reform legislation by the start of next year. But on an ominous note it concluded with a clear warning not to give into Kolomoisky's pressure, nor return or compensate him for the nationalisation of PrivatBank.

“[The IMF team] also underscored the importance of central bank independence and safeguarding financial stability, as well as the need to make every effort to minimise the fiscal costs of bank resolutions,” the IMF said. “Discussions on the new programme will continue in the coming weeks.”