Economic Recovery: Steady As She Goes
Ukraine’s economy is steadily recovering now. During H1, GDP grew 2.4% y/y, twice as fast as forecast. Local investments grew 22.2% y/y, and private consumption grew 4.7%, driving growth, despite the continuing decline in industrial output, and contraction in farm production. We expect a 2% y/y GDP increase by yearend, and acceleration to 3% y/y in 2018.
A very good sign is the modest uptick in non-energy imports, despite soaring domestic demand, and currency strengthening to August. This trend is quite unusual for Ukraine, and could reflect structural changes. As a result, the September CAD reached $3 billion, only slightly higher than the $2.7 billion deficit of a year ago. Against this backdrop, we have improved our 2017 CAD forecast to $4.1 billion, or 3.9% of GDP, from the $4.4 billion we projected earlier. For 2018, we maintain our projection that CAD will expand to $5.1 billion, or 4.6% of GDP.
A delayed IMF tranche spoiled prospects for financial flows. A Eurobond placement prior to the fourth review eased pressure and removed the incentive for the government to undertake further painful steps. At the same time, the issue of natural gas rates — Ukraine did not raise gas prices as promised — appears to have been critical for the Fund. The next IMF wire might only come in early 2018, in the best case. So we’ve lowered our 2017 gross international reserves forecast to $18.1 billion, or 3.6 months of imports, from $19.6 billion.
Since the end of August, the hryvnia has once again been slipping. At this writing, the hryvnia had lost 4.9%, to reach UAH 26.75 per dollar, from 25.44 in August. Growing public outlays and a widening trade deficit are behind this trend. The state Treasury continues to maintain large cash accumulations—UAH 48.6 billion, or 1.8% of GDP as of November 1st—which will be spent by the end of December. This cash overhang will cause the hryvnia to slip further, to 29 by yearend.
The inflation trajectory is surpassing all expectations. For September, CPI grew 10.2% ytd, beating a 9.1% ytd yearend inflation target for nine months. Food inflation is the main driver. We expect the inflation spiral to start easing in early 2018, but for this year we’ve revised our inflation forecast upwards. In 2017, we expect the CPI to rise by 12.6% ytd, or 14.2% y/y, vs. the 12% ytd and 14.1% y/y we estimated previously. For 2018, we expect inflation to slow to +6.9% ytd, or +9% y/y.
Fiscal revenues are booming. For September, general budget collections increased 41.1% y/y, and continued to grow far above the yearend target of 26.3% y/y. In Q4, we expect a slight revenue slowdown, due to the high comparative base -- but collections will meet the annual revenue plan. By September, the general budget continued to post a hefty surplus of UAH 41.7 billion, or 1.5% of GDP, meaning that deficit risks are moderate. We expect the general deficit to remain below 3% of GDP in 2017.
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