As economy improves, Poroshenko leads in polls
Fresh voter polls are giving President Petro Poroshenko the best chance of winning the 2019 presidential race. Ukrainians seem to see that Poroshenko is not perfect, but he can claim some positive achievements, like the visa-free regime with the EU. Given the improving economic situation, he’s likely to strengthen his position over the next year or so. Among popular measures he plans to benefit from is a tax on withdrawn capital — effectively a tax on dividends. The corporate profit tax offers plenty of interpretation room for the Tax Administration — and therefore corruption opportunities. A tax on withdrawn capital should eliminate this arbitrariness, and has been widely welcomed by business. There was a new wave of anti-corruption scandals in November. The National Anti-Corruption Bureau of Ukraine (NABU) organized a few high-profile arrests, but its courage only triggered active resistance from Ukraine’s establishment. So the Prosecutor General’s Office and the Security Bureau of Ukraine (SBU) aborted one of NABU’s covert operations, and declassified its agents. The U.S. Department of State reacted harshly to this new attack on NABU.
Industry keeps suffering from broken supply chains with the occupied Donbas. In October, industrial output inched up only by 0.4% y/y, with mining down 8.1% y/y, and utilities down 7.6% y/y, dragging growth down. We expect nearly flat industrial growth for 2017. Retail trade slowed to +4.4% y/y, from +8.2% y/y in September. But we’re optimistic about private consumption, and project a 4.6% y/y private consumption increase by year’s end.
The CPI eased in October to +1.2% m/m, or 14.6% y/y, down from 2% m/m to 16.4% y/y in September. Still, inflation remains above the projected rate, due to continuing strong inflation in food prices. By yearend, we expect CPI to be up 13.3% ytd, or 14.4% y/y for 2017.
Budget revenues slowed in October to 19.2% y/y, from 23.4% y/y in September. A 50% drop in the NBU profits against a high comparative base was the main reason. Core tax collections remain in good shape. Budget revenues should meet the yearend target of +27.4% y/y. As of December 1st, cash residuals on the Treasury account were UAH 54.1 billion, or 1.9% of GDP. That promises a budget deficit far below the 3% of GDP target.
The CAD reached $3.3 billion, from $2.9 billion a year ago. That’s in line with our estimate: we forecast a $4.1 billion CAD (3.9% of GDP) at yearend. The hryvnia is feeling downward pressure, with the widening CAD and higher budget outlays. The approaching surge in yearend budget outlays promises to push the hryvnia down to UAH 29 by yearend.
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