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Ukraine Country Risk Report Q4 2017

Ukraine Country Risk Report Q4 2017

Core Views

Economic recovery in Ukraine will be sluggish in the years ahead.

The country is stepping out of a prolonged period of economiccontraction, having experienced two fully-fledged economic crisesin the last seven years.

It is unlikely that the Ukrainian government will retake control ofCrimea and Sevastopol, nor the occupied parts of the Donetsk andLuhansk regions.

Structural reform implementation of the country’s IMF bailout programmewill face an uphill battle.

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 2017 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. Ethnicdivisions in NE Ukraine not nearly as clear cut as Crimea and it wouldbenefit Putin to retain a large ethnic Russian influence in mainlandUkraine (enabling him to maintain a direct political stake in Ukrainianaffairs). Moreover, Russia’s shift of its attention to Syria will benefitUkraine, while both Moscow and Kiev have urgent economic needsto end the fighting in eastern Ukraine.

Major Forecast Changes0
As the economic fallout of the Donbas trade blockade is startingto subside, we revised up our 2017 real GDP growth forecast from2.0% to 2.3%.

Following a strong fiscal performance in H117, we have reviseddown our 2017 fiscal deficit forecasts from 3.3% to 2.0% of GDP


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth Outlook To Improve As Blockade Impact Fades
We have upgraded our real GDP growth forecasts for Ukraine as the negative fallout of the Donbas trade blockade is starting to
subside. Economic activity will be supported by rebounding steel and robust agricultural exports, while recovering household purchasing
power will continue to fuel growth in the retail sector. That said, absent an acceleration of structural reforms, real GDP growth will
remain below pre-crisis averages.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
C/A Deficit To Narrow But Financing Risks Still Present
Ukraine's current account deficit will narrow over the next two years, as impact of the Donbas trade blockade on steel exports subsides
and agricultural exports remain strong. That said, rebounding import demand for consumer and capital goods will keep the current
account firmly in negative territory, which will keep financing risks relatively elevated as FDI struggles to recover.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS IMPORTS IN 2016
TABLE: TOP 5 GOODS EXPORTS IN 2016
Monetary Policy
Moderating Inflation To Pave Way For Rate Cuts
Fading supply-side and flat core price pressures imply that disinflation will return over the coming quarters in Ukraine. This in turn will
enable to Ukrainian National Bank to continue easing monetary conditions, and thus we expect further rate cuts and a gradual easing of
capital controls over the next two years.
Monetary Policy Framework
TABLE: MONETARY POLICY
Fiscal Policy And Public Debt Outlook
Sovereign Risks To Rise Beyond The Short Term
While Ukraine's fiscal performance in H117 surprised to the upside, the government ' s budget will return to a deficit over the coming
quarters. Ongoing cooperation with the IMF will ensure fiscal and debt sustainability over the short term, although over the longer-term
structural reforms and a more broad based macroeconomic recovery are necessary to guarantee financial stability.
Structural Fiscal Position
TABLE: FISCAL POLICY
Currency Forecast
UAH: Latest Stability No Harbinger Of Long-Term Strength
Stabilising real GDP growth and an impending IMF bailout tranche dispersal will keep the hryvnia stable over the short term. Over the
longer term however, high inflation and an inherently unstable macroeconomic and political backdrop will keep the exchange rate on a
modest depreciatory trajectory.
TABLE: BMI CURRENCY FORECASTS
Contents
Chapter 2: 10-Year Forecast
The Ukrainian Economy To 2026
Growth To Remain Below Potential
Having failed so 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 ten years. While there is still enormous unrealised potential in terms of
political reform and economic catch up, without continuous institutional and economic reform, Ukraine's curret economic growth model
will prove unsustainable over the coming decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
TABLE: 2017 WORLD BANK EASE OF DOING BUSINESS INDEX
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Pension Reform Calms Political Uncertainty As IMF Loan Disbursal Nears
Having passed the crucial pension reform, political uncertainty regarding Ukraine ' s structural reform commitment and potential early
elections will subside over the coming quarters. Additionally, the reform paves the way for the next IMF bailout loan disbursal, which will
boost investor sentiment and enhance the country's ability to tap international bond markets by end-2017.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Eastern Separatism To Persist; Reforms To Face Bumpy Path
Ukraine will emerge weaker from the ongoing conflict, losing de facto control of the separatist East to pro-Moscow forces. Even without
the conflict, President Petro Poroshenko actually faces colossal challenges in averting economic crisis, tackling corruption, and
reforming the economy.
Chapter 4: Operational Risk
Operational Risk
TABLE: OPERATIONAL RISK
Labour Costs
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE
Legal Environment
TABLE: BUREAUCRATIC PROCEDURES
Chapter 5: BMI Global Macro Outlook
As Good As It Gets?
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: UKRAINE – MACROECONOMIC DATA & FORECASTS

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