Weathering a rather easy coronavirus crisis
The first phase of the COVID-19 crisis was soft for Ukraine. The global lockdown did the job currency shocks used to do for the country in the past. As a result, imports have fallen much faster than exports, as supply chains broke and energy prices fell. This translated into an impressive balance of trade surplus, which quickly boosted the hryvnia, after initial panic led to a 13% plunge in March. Despite apocalyptic news from abroad, Ukrainians found themselves in a quiet harbor, with a sounder trade balance, stronger currency, slower inflation and a commercial banking system still operating actively.
The economy reportedly contracted by 1.3% y/y in Q1, with fixed asset investments, at -21.4% y/y, driving the contraction. Household consumption remained strong, at +8.1% y/y in Q1.
In April, after tough lockdown rules were introduced, the worst statistics could be seen in industrial output, down 16.2% y/y, and retail sales, down 11.6% y/y. But by May, Ukrainians were slowly ignoring quarantine rules, and the numbers improved. Retail trade was reported down only 1.5% in May from 2019.
Micro-businesses were the main lockdown victims, suffering from initially tough restrictions. Ordinary Ukrainians also reported financial losses. But there’s no solid evidence of a dramatic income decline among employed people. Unemployment levels also changed only marginally.
We expect GDP to fall 6.5% y/y in 2020, with private consumption and fixed asset investment driving the decline. Improving trade should defend GDP from a deeper drop in 2020. We expect GDP to rise by 3.4% y/y in 2021, on the back of a low statistical baseline.
Although Ukraine is running a trade surplus, we expect the situation to change due to stronger decline in non-food exports, and delayed demand for imports. Nevertheless, we expect the CAD to improve, to 1.4% of GDP in 2020, from 2.7% in 2019.
With positive trends in external accounts, we expect the hryvnia to remain stable, potentially easing slightly starting in H2, as the trade deficit returns. We project the hryvnia at around UAH 27/ dollar by yearend. Inflation is expected to stay low, as the hryvnia remains stable, and energy prices remain subdued. We project CPI at +5.4% ytd, or +3% y/y in 2020. The budget will be the main victim of the crisis, with imports falling and a strong currency, as MinFin budgeted for a much weaker hryvnia. Current trends promise tax collections at least UAH 55 billion, or 1.4% of GDP less than MinFin targeted. Still, we don’t believe the government will run a wider deficit than it has committed to with the IMF—no more than 8% of GDP.
Hopes that the new administration would improve the business environment have proven unfounded. There’s been no progress in fighting selective justice. Changes in tax rules have been judged oppressive for business. Given the tough global situation, we can hardly imagine Ukraine attracting production capital soon.
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