Ukraine: Income inequality and age heterogeneities as default determinant (SIDE-NOTE)

Despite the jobless growth of the Ukrainian economy, we assume that the current official level of income inequality does not impact traditional tradeoff between an immediate boost in public consumption and repayment of sovereign debt. Quite high probability of the power centralization scenario means low probability of the Government’s capitulation to the increasing “popular” demand for default, due to income inequality. Nonetheless, the modern profile of Ukraine’s economic growth, with its high reliance on export-oriented industries, could intensify inequality (as in the period 2000-2005, when rising export proceeds had a positive impact on the incomes of the upper-medium group only. Moreover, current official figures for income inequality may be too low, as long as the shadow economy (est.40% of GDP) is responsible for a high share of undeclared salaries.
The other problem is the worsening age heterogeneities, as the older generation – with little concern for the country’s access to capital markets – could force a default on debt. We believe that these factors may adversely affect the probability of a sovereign debt default in the long-term period and continue to monitor them carefully…