Advances: Pensions & Eurobonds
Parliament finally voted in the long-awaited pension reform, in early October. The law increases effective retirement age (higher requirement of years in service before being vested in a pension), leaving the headline pension age unchanged at age 60. It also envisages immediate pension rises from October. The IMF had concerns over some points of the reform, like the increase in pensions in October, and a second-tier pension system. But in general the approved law should be close to what the IMF was requesting.
A $3 billion Eurobond issue was another critical recent piece of news. Ukraine has returned to the global financial markets: the risks of default have faded. Still, we recognize that this placement eased pressure on the authorities in terms of further reform efforts, in the run-up to the 2019 presidential election. Approval of pension reform is not a part of this story, since for Ukrainians it was not about tight measures, but immediate pension increases. But other issues, like an anti-corruption court and transparent privatization will face noticeable resistance, we believe.
The economy has been sending clear signals of recovery, on the back of domestic consumption. Retail trade picked up to 9.7% y/y in August, from 6.6% y/y in July. What’s more, official statistics show 6.6% y/y growth in private consumption in Q2. This means that our initial estimate of (+2.3% y/y for 2017) was too pessimistic. Consumption now looks likely to grow over 4% in 2017.
Industrial output remains volatile. In August, it recovered to +1.2% y/y, after -2.6% y/y in July. However, this is much worse than expected, given strong export prices. August industrial performance tells us that output will likely grow less than 1% in 2017.
Consumer prices dropped 0.1% m/m in August, reflecting a 0.6% m/m decline in food prices through the month. For August, inflation stood at 8.1% ytd. The trend is in line with our forecasts, which we leave unchanged at +12.0% ytd and +14.1% y/y in 2017.
Budget revenues grew 31.4% y/y in August. For August, collections increased 43.4% y/y. The balance of the general budget was in the black, with a surplus of UAH 68.6 billion or 2.5% of GDP by August. In coming months, state revenue growth will slow, due to the high baseline. However, the chances of meeting the 25.5% revenue growth target for 2017 are excellent. The budget deficit should also be less than 3% of GDP.
The CAD narrowed to $226 million in August, from $597 million in July. The hryvnia has resumed weakening. In September, it depreciated 3.3%, to UAH 26.58/dollar. A change in consumer mood is the main reason. We expect a fall to UAH 29/dollar in 2017.
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