Glimmers of Recovery
Ukraine is definitely on recovery path. Macroeconomic statistics are exceeding projections, and political life is finally stabilizing. The business environment has also begun improving, with evidence of some steps taken toward reform. But the recovery should largely be understood as stemming from a low indicator baseline from the same period in 2015. What will occur when this temporary statistical effect begins to fade is anyone’s guess. Another danger is that Ukraine’s improved economic status makes painful reform seem less pressing – which will threaten further reform efforts.So we unfortunately envision stunted growth prospects for the near term.
GDP ticked up 0.1% y/y in Q1, the first quarter of growth since the end of 2013, with net exports and investment the main drivers. Yet private consumption was still falling (-2.1% y/y in Q1). Though the composition of Q1 growth is by no means homogeneous, the general trend is positive. We expect private consumption to strengthen on the back of growing confidence, amid relative economic stability. We expect to see GDP grow 1.4% y/y by yearend, and then by 2.5% in 2017.
The current account surplus, at $327 million as of April, and regular Central Bank FX market interventions, signal that things in external accounts are going smoothly. Yet these tendencies could be temporary. We hold that the delayed purchase of natural gas in H1 all but ensures an upswing in energy imports in H2. In particular, over May Naftogaz imported only 3 BCM of natural gas, while Ukraine requires at least 12 BCM to get by in 2016. We’ve also seen a strong tendency for developing non-energy import growth (+21.3% y/y in April, +15.5% y/y in March and +8.9% y/y in February), a clear signal of a speedy CAD return, especially given uncertain prospects for resource prices. We are now projecting a $3.8 billion (4.3% of GDP) CAD in 2016, with a widening to $4.9 billion (5.5% of GDP) in 2017.
The hryvnia was stable as of June, even strengthening slightly, to below 25 hryvnia per $1 at the time of this writing.However, in light of the CAD’s inevitable growth, we expect depreciation pressures to resurge in a few months. We expect the hryvnia to slide to 28 per $1 by yearend, and to hit 30 in 2017.
Revenue collection continues to be strong (+12.2% y/y). This result was achieved disregard high comparative base and no support from the Central bank so far. We estimate that 2016 budget collections will even exceed the year target, which should ensure that Ukraine meets the 3.7% of GDP central budget deficit cap agreed upon with the IMF.
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