Continuing growth despite IMF issues
Ukraine’s economy is clearly enroute to recovery. GDP grew 2.5% y/y in 2017, on the back of private consumption, which rose +7.6% y/y, and local investment, which jumped +18.1% y/y. GDP would have grown even more if not for a -6.3% y/y drop in the grain harvest, and a -16.3% y/y decline in coal extraction.
We expect GDP to accelerate to 3.2% y/y in 2018. The pattern of growth will be very similar to that of 2017, but this time industry and agriculture will contribute to the positive trend. Industrial output has already moved positively, climbing +2.8% for February 2018, and is expected to be strong, on the back of the low baseline. Agro-production also is expected to recover.
External accounts appeared to be in much better shape than previously thought. The National Bank of Ukraine (NBU) upgraded its estimate for remittances over 2015-2017. As a result, 2017’s $3.8 billion CAD translated into a $2.1 billion deficit, after the data was adjusted. We still expect the trade deficit to expand, based on reviving domestic demand. However, a large part of that increase will be offset by growing remittances. The CAD should remain at a safe level of $2.6 billion, or 2.1% of GDP, in 2018.
Prospects for financial inflows are inauspicious. Ukraine is likely to receive one more wire from the IMF this year, but we’re not completely comfortable with this expectation. President Petro Poroshenko openly claimed that certain IMF demands are against the Ukrainian Constitution, which means that chances for resumed cooperation are fairly slim.
Consumer inflation remains high, as food prices continue to rise. But inflation should slow in H2, as soon as the new crop comes in. CPI should slow to +8.2% ytd, or +11.2% y/y, in 2018.
General budget revenues have slowed to +3.4% y/y for February, vs. +55.3% y/y a year ago. Automated VAT refunds, which pushed VAT reimbursements up, are among the key reasons for this revenue slowdown. Despite this weak start, we expect budget revenues to meet their target, and the budget deficit to remain below 2.5% of GDP in 2018.
The hryvnia has been strengthening since January, and now hovers around UAH 26 per dollar. The traditional U-turn is likely, starting in September, as the CAD widens, and the usual autumn depreciation fears grow. We expect the hryvnia to touch UAH 30 per dollar by yearend.
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