Good but Sad
The general picture for Ukraine’s economy is both good and not so good. The economy is now in the black, and GDP grew a much better than expected 2.5% y/y in Q1 2017. Still, growth was driven by a temporary improvement in the balance of trade — a trend that shifted during April. We now expect GDP growth to slow over the year, and project 1.8% y/y growth for 2017, down from 2.3% y/y in 2016.
The rupture in economic relations with occupied Donbas passed without notice for most ordinary Ukrainians. The hryvnia remains stable, and budget revenues are booming. Industrial numbers also recovered from May but for 6m 2017 industry is still in the red, with -0.4% growth.
External accounts are robust, with the CAD only slightly exceeding last year’s levels, at $1.1 billion, vs. $1 billion for May. However, the trade deficit has already visibly widened since April, which threatens a CAD expansion to $4.4 billion, or 4.2% of GDP in 2017, up from $3.8 billion or 4.1% of GDP a year ago.
Financial and capital accounts substantially improved, rising to a $1.8 billion surplus in May, vs. $1.1 billion a year ago. This looks encouraging. However, a large part of that improvement is either statistical or related to a €600 million loan from the European Union, under a macro-financial assistance program. FDI has been negligible, reaching only $526 million by May. The flow of personal cash back into the banking system has slowed, although it remains the main source of cash surplus on the FX market so far.
The hryvnia had been strengthening since the start of the year, and has been stable through summer, hovering near UAH 26 per dollar. The trend towards appreciation stems from confidence among individuals selling cash to commercial banks. Still, the trade deficit is growing, and Ukrainians could grow skeptical over the currency’s prospects at any time. We see the potential for depreciation in the upcoming months, and project UAH at 29 per dollar by yearend.
Inflation sped up to 7.9% ytd by May, up from +4.9% ytd a year ago. But the only reason for the price rise was a surge in vegetable prices, up 71.4% ytd, and fruit prices, up 52.7%. Prices for all other consumer goods remain relatively stable. Due to this statistical effect, we have revised our inflation forecast upward to +12.0% ytd, and +14.1% y/y in 2017, from +8.3% ytd and +11.8% y/y.
The main unqualified good news concerns budget revenues. Ukraine’s coffers are full. By May, the general budget surplus was at 2% of GDP, or UAH 50.6 billion. For May, budget revenues surged 46% y/y, while the annual target presumed around 20% growth. Some of this success is related to UAH 29.7 billion, or $1.1 billion, confiscated from ex-president Viktor Yanukovych. However, core revenues also soared 30% y/y for May. Against this backdrop, the deficit target of 3% of GDP looks achievable.
The Security Bureau of Ukraine has become one of the main troublemakers for businesses. The war with Russia has made the SBU politically untouchable, and now it seems that intelligence officers have taken the lead in the business of racketeering. We hear about regular SBU raids at enterprises, in which computers and documents are seized. Nominally, these actions are justified for security reasons. In too many cases, however, such actions appear to have purely commercial ends.
Now read on...
Register to sample a report