Ukraine Country Risk Report Q4 2017
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
- 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