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Ukraine Country Risk Report Q2 2016

Ukraine Country Risk Report Q2 2016

Core Views Economic recovery in Ukraine will be sluggish in the years ahead. The country is stepping out of a prolonged period of economic contraction, having experienced two fully fledged economic crises in the last seven years. It is unlikely that the Ukrainian government will retake control of Crimea and Sevastopol, nor the occupied parts of the Donetsk and Luhansk regions. Ukraine will only meet part of the major structural reforms that are required by the IMF through its financing package. The Ukrainian authorities have already removed most of the gas subsidies and also implemented pension reforms. However, fighting endemic corruption, reforming the judiciary, and improving the banking sector and the business environment will take a slow pace. Despite the new IMF package, Ukraine’s FX reserves remain poor. FX reserve levels will also remain under pressure in the long term, as imports will outpace exports again in 2016 and beyond. Russian President Vladimir Putin will be happy with Crimea for now, and will not push for annexation in the North East of Ukraine. Ethnic divisions in NE Ukraine not nearly as clear cut as Crimea, and it would benefit Putin to retain a large ethnic Russian influence in mainland Ukraine (enabling him to maintain a direct political stake in Ukrainian affairs). Moreover, Russia’s shift of its attention to Syria will benefit Ukraine, whilst both Moscow and Kiev have urgent economic needs to end the fighting in eastern Ukraine. Major Forecast Change We have adjusted our inflation and current account forecasts, as the current political crisis will prevent to IMF from disbursing the third tranche of Ukraine’s Extended Fund Facility.


Executive Summary
Core Views
Major Forecast Change
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Political Crisis Puts Pressure On Growth
A further deterioration of the political crisis in Ukraine will drag on growth in the coming years.
Economic Growth Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Monetary Policy
UAH Depreciation Putting Inflation Target Out Of Reach
Inflation in Ukraine will continue to fall sharply in the coming months. However, the decline will be less than the central bank anticipates
as the political crisis puts pressure on the currency.
Monetary Policy Framework
TABLE: MONETARY POLICY
Fiscal And Debt Outlook
Budget Deficit To Shrink
Tax reforms in Ukraine will have a net positive effect on increasing government revenues in the years ahead.
Structural Fiscal Position
TABLE: COMPARISON OF KEY TAX RATES
TABLE: FISCAL POLICY
External Trade And Investment Outlook
Structural Reform Needed To Prevent BoP Crisis
Ukraine will face a renewed balance of payments crisis if the government turns out to be unable to push forward structural reforms.
While dependency on Russia for gas imports is fading, import growth will outpace exports again over the coming years.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS IMPORTS IN 2014
TABLE: TOP 5 GOODS EXPORTS IN 2014
Currency Forecast
UAH: Capital Controls To Have Little Effect
Ukraine's political crisis will be a strain on foreign currency reserves and in turn the hryvnia exchange rate in the coming months.
Nevertheless, we do not believe that capital controls will be fully lifted in the next 24 months.
TABLE: EXCHANGE RATE FORECASTS
Chapter 2: 10-Year Forecast
The Ukrainian Economy To 2025
Colossal Structural Reform Needed To See Through The Decade
Having failed thus far to break free from its dependence on cheap energy and a low-value added export base, Ukraine has arguably
squandered the economic windfall experienced over the last 10 years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Stalled Reforms To Have Large Implications
The resignation of Ukraine's economy minister will not only put pressure on the government to deliver structural reforms, but will also
likely prevent the IMF from disbursing Ukraine with highly necessary financing in the coming months.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Eastern Separatism To Persist; Reforms To Face Bumpy Path
Ukraine will emerge weaker from the 2014 conflict, losing de facto control of the separatist East to pro-Moscow forces. Even without
the conflict, President Petro Poroshenko faces colossal challenges in averting economic crisis, tackling corruption, and reforming the
economy.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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