Ukraine: Zelensky looks to build parliamentary support to stamp out corruption in snap vote
Ukrainians will head to the polls for parliamentary elections on 21 July, in an early vote brought forward by new President and political novice Volodymyr Zelensky. Zelensky is seeking to capitalize on his momentum after winning a resounding victory in April’s run-off presidential election and current opinion polls indicate a solid lead for his party Servant of the People. And if Servant of the People does indeed secure a majority, it will give Zelensky the muscle to push through legislation and prevent a lame-duck government, which would bode well for the economy. Nevertheless, there is still sizable uncertainty. Ukraine’s electoral system, which allocates half of Parliament’s seats through single-mandate districts, can make it difficult for a party to achieve a majority and also to predict the outcome via the use of polls. Moreover, Zelensky’s party is an untested entity and it is uncertain how it would perform in a coalition. In addition, there are some lingering doubts over the party’s and Zelensky’s full agenda when in office, especially regarding the IMF program and the stomach to push through necessary but unpopular reforms.
If Servant of the People does secure an outright majority it would give Zelensky the power to implement his agenda, which centers on tackling widespread corruption that currently permeates the country. Zelensky and his party have pledged to overhaul the prosecutors’ office, free businesses from the grip of oligarchs and end immunity for lawmakers, as well as promising to increase military spending and digitalization. Rampant corruption weighs heavily on Ukraine’s business environment and these measures could help to both boost sentiment and attract investment in the longer-term, while also satisfying the wishes of the IMF. Other economic policy prescriptions by Zelensky and his party are vaguer which is generating some uncertainty, although he has pledged to keep the country on its pro-European path and cooperate with the IMF.
Negotiations on a new loan program with the Fund will start after the election and will likely include the IMF’s typical prescription of tough reforms for cash. While Zelensky has struck a promising tone regarding the IMF since taking office, he criticized aspects of the past agreement during the campaign trail including gas price hikes. The criticism along with Zelensky’s political inexperience muddies how the upcoming negotiations will play out. The country is reliant on continued IMF support to service its sizable external debt load and, with the current program set to expire early next year, successful negotiations are critical to the outlook.
Looking ahead, growth is expected to decelerate this year as political uncertainty weighs on confidence and authorities’ hands remain tied by defense and debt commitments. In addition, slower growth in key trading partners will also weigh on activity. Risks to the outlook stem from reform momentum, stalled IMF negotiations and geopolitics.