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Ukraine: Current Economic Situation and Future Prospects

Ukraine: Current Economic Situation and Future Prospects. Oleg Ustenko Executive Director, The Bleyzer Foundation October 2012. Ukraine: Economic Growth. In 2010 and 2011, GDP grew by 4.1% and 5.2%, respectively.

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Ukraine: Current Economic Situation and Future Prospects

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  1. Ukraine: Current Economic Situation and Future Prospects Oleg Ustenko Executive Director, The Bleyzer Foundation October 2012

  2. Ukraine: Economic Growth • In 2010 and 2011, GDP grew by 4.1% and 5.2%, respectively. • In 1H 2012, GDP rate of growth declined to 2.6% yoy, due to shaking international economy. • Since June, economic growth has slowed affected by further weakening external environment and domestic factors. • For the entire 2012, real GDP growth forecast is 1.5% yoy. Real GDP Growth by Demand, Contribution to Growth, % points Sources: State Statistics Committee, The Bleyzer Foundation

  3. Drivers of GDP Growth: High Consumption • In 1H 2012, retail sales turnover was up by 16% yoy. • This growth in consumption was stimulated by steady increases in real wages (+16% yoy in 1H 2012). • Strong real wage growth was the result of: • higher budget expenditures on social security and wages (+28% yoy vs. +13% yoy increase in total budget spending in 1H 2012); • record low inflation for the period. Real Wage and Retail Sales Growth, % yoy * Excluding private entrepreneurs’ and informal markets. Source: SSC, TBF • The Euro-2012 football championship supported the construction sector and contributed to cosumption growth.

  4. Drivers of GDP Growth: Strong Agriculture Grain Production in Ukraine, million tons • For 2012, grain output is forecast at about 44 million tons. • Though lower than the 2011 record output, it will be higher than the historical average.

  5. Progress in Easing Inflationary Pressures Contributions to CPI Growth, percentage points Select Monetary Indicators, % yoy Source: State Statistics Committee, NBU, TBF • In Jan-Sep 2012, inflation was at a decade low 0.8% yoy due to: • a generous 2011 harvest of grains and vegetables; • easing of world energy prices; • lower rate of growth of money supply; • government reluctance to raise gas and utility tariffs ahead of elections.

  6. Progress in Addressing Sort-Term Fiscal Needs • State budget revenues rose by nominal 17% yoy in 1H 2012, due to advance tax and other payments. But since then they notably decelerated (9% yoy in Jan-Aug). • Expenditures grew by 14.5% yoy over Jan-Aug. Moderate growth was mainly due to a delay in some spending programs. • As a result, the state budget deficit was almost three times higher in Jan-Aug than in 2011. • Overall public sector deficit in 2012 is forecast at 4% of GDP as we expect budget spending adjustment after elections. Public Sector Fiscal Deficit, % of GDP * State and local budget deficits ** Pension Fund Loans from Single Treasury Account • But Ukraine has secured sufficient resources to cover its short-term needs thanks to $2.6 bn Eurobonds issued in July and September, a $2 billion VTB loan rollover, $0.7 bn privatization revenues, and domestic borrowings.

  7. Progress in Financing the Balance of Payments • In 8m 2012 export growth slowed down to 2.9% yoy, as a result of: • weaker foreign demand; • lower world commodity prices; • trade restrictions by Russian on dairy, cheese, meat, and other products. • Imports also slowed down, due to lower energy imports but grew much faster than exports. • In 2012, the current account deficit is forecast at about 6% of GDP (compared to 5.5% of GDP in 2011). • So far, this deficit is financed by a financial account surplus (despite high external debt service), due to capital inflows ( mainly trade credit, ST capital).

  8. Current Challenges: Fiscal Sustainability Concerns • Robust revenue growth in 1H 2012 was partly achieved thanks to one-off transfer of NBU profits and stronger tax pressure on business. • Due to lower economic growth, the original revenue targets contained in the budget law are unlikely to materialize. • Expenditures are also likely to be higher than originally planned, since generous social payment increases were not covered by sufficient compensatory measures. • Furthermore, due to delays in energy tariffs increases, Naftogaz deficit is forecast to remain at about 2% of GDP. • Public debt may also be strained as at the end of July, Parliament raised the limit of state budget private credit guarantees by 4.6 times to about 4.6% of projected full-year GDP. • Though Ukraine has secured sufficient financing for ST fiscal needs, after the October elections, the government will need to take measures to be able to finance the deficit and sustain its public debt.

  9. Current Challenges: Weak External Environment World Steel Prices, Export of Goods and Industrial Production of Ukraine, % yoy

  10. Outlook for 2013 • Shortly after the October elections, macroeconomic pressures will give Ukraine no choice but to resume co-operation with the IMF, most likely in the form of a new stand-by agreement. • To secure IMF financing likely conditions would include: • Natural gas tariffs must be raised in stages (about 50% each stage) • The 2013 budget law must be approved with significant reduction in expenditures and a fiscal deficit of no more than 2.5% of GDP • Foreign exchange controls will be eased and a more flexible exchange rate regime must be allowed, resulting in a Hryvnia depreciation • Further measures to restore the health of the banking sector • Other fiscal/energy reforms must be initiated.

  11. Outlook for 2013 (cont.) • As a result of these measures: • Consumer inflation will accelerate to about 8% yoy in 2013; • The Hryvnia is likely to depreciate, but the process will be moderate and under control of the central bank. • The currency depreciation, the reform program as well as projected global growth revival will support exports and, thus, economic growth in 2013, with GDP increasing by about 4% in 2013. • Lower fiscal expenditures will weigh on domestic demand growth but its impact should be partially offset by resuming bank lending. • If the October’s elections are recognized as broadly meeting international standards, there will be good chances that FTA between the EU and Ukraine is ratified. In this case, real GDP may grow even faster. • After elections, Ukraine will have about 1.5 years of relatively calm political period, which increases the chances for implementation of painful but necessary structural reforms.

  12. Key Macroeconomic Indicators * Includes implicit pension fund deficit (credits from unified Treasury account (state budget) to cover pension fund expenditures) for 2007-2008 and Pension Fund and Naftogaz imbalances since 2009, excluding bank recapitalization and VAT bonds

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