Growth Smooth, and Picking Up
The Ukrainian economy has returned to a smooth growth trajectory. Absent any unexpected news, or shifts in macroeconomic trends, it’s hard to be displeased. External demand remains weak, and will hardly become a near-term driver of growth, though internal consumption has recovered steadily, which will feed into further economic strengthening. In politics, turbulence is also dissipating, as is customary in Ukraine in autumn. After the IMF approved its next wire for Ukraine (of $1 billion) and the EU took its first real steps towards the approval of a visa-free regime for the country, chances for early parliamentary elections appear ever slimmer. Still, we’re now more concerned with the progress of reforms, since the general situation will be less pressing for politicians as the economic situation improves. We’re maintaining our cautiously optimistic view of Ukraine’s economic prospects, and sticking to our forecast of 1.4% growth for the year.
GDP growth rose to 1.4% y/y in Q2, which denotes real progress, from the 0.1% y/y in Q1. Private consumption (+4.3% y/y) and investments in fixed assets (+17.6% y/y) were the main sources of growth. This is largely in line with our forecast, and leads us to keep our projection unchanged at 1.4% y/y for 2016.For 2017, we expect further improvements in internal demand, which should translate into a 2.5% y/y GDP growth in 2017.
Ukraine’s current account situation began to worsen in July, and by August the CAD had reached $1.4 billion. Through autumn the trade deficit is expected to expand, driven by energy imports. We expect the CAD to reach $3.8 billion, or 4.3% of GDP, by yearend, and to grow to $4.9 billion (5.5% of GDP) in 2017.
The hryvnia has been depreciating since August, amid worsening external accounts, and though the recent IMF loan and placement of Eurobonds eased the market for the moment, we expect the deepening CAD to weaken the hryvnia further.We expect the hryvnia to reach 28 per $1 in 2016, then 30 in 2017.
The budget remains on the safe side, as general budget revenues grew 13.0% y/y for 8m 2016 (the annual target is 14.1% y/y) amid the delayed UAH 38 billion “profit” wire to be transferred from the Central Bank. We even expect budget collections to exceed their designated targets, and that the budget deficit will fall within the pre-determined 3.7% of GDP cap.The fiscal prospects for 2017 also appear to be in good standing, and with the Finance Ministry putting forth a rather realistic spending plan with only minor changes, and no quasi-fiscal outlays for 2017, sensible fiscal decision making seems to be taking hold.Budget revenues in 2017 may even exceed targets, which makes us optimistic that the 3% of GDP central budget deficit target can be reached.
Inflation so far is reported to be very low (+4.5% ytd by August) but is expected to speed up in September on the back of higher electricity rates. For 2016, we expect CPI to keep growing at 11.6% ytd (+15.4% y/y), and inflation in 2017 to keep easing, settling around +8% ytd (+10.7% y/y).
Now read on...
Register to sample a report