Ukraine Country Report Sep17 - September, 2017

September 4, 2017

Ukraine's real GDP grew 2.4% year-on-year across April-June, the Ukrstat state statistics agency in Kyiv reported on August 14. That is good news, but it also shows the economy has slowed from the 4.2% growth in the fourth quarter of last year.

In July, the National Bank of Ukraine (NBU) revised downwards its forecast for real GDP growth for 2017 to 1.6% y/y from its 1.9% y/y projection in April.

The economy is recovering but it should have seen a big bounce after the depth of the collapse in 2015 – more than 15%. The reason it is not is partly due to the Russian aggression, but not only.

The government's persistent failure to attempt deep reforms has undermined what little investor interest there is and the economy is living hand to mouth. The economic blockade of Donbas has not helped either, however, economists say this is less important and will be overcome eventually. In the meantime the blockage has probably shaved 1% off GDP growth.

GfK did a big survey on the mood of the people (see Polls & Sociology for the charts below) but the big take aways were the government has a c.80% disapproval rating. And while Yulia Tymoshenko leads in the polls, the low support for all the possible candidates in elections show that the population is basically dissatisfied with all their leaders.

The mood is not helped by the poor outlook. The economic  forecast was revised due to the worse than expected economic performance in the first half of the year, primarily in services, and revised crop yield assessments. Industries most susceptible to the severance of production ties with the uncontrolled Donbas territories - the mining and metals sector, energy industry and transport industry - will continue to underperform, according to the NBU.

However, there is some progress. The hryvnia has proven to be more stable than many analysts were expecting around the UAH25/$1 market, where it was expected to weaken to around UAH28/$1. Also inflation is falling and tax receipts have proven to be much stronger than expected. Also gross international reserves (GIR) are up to $17bn which is about 3.8 month of import cover – a healthy level that supports the value of the national currency.  The growth in April-June was driven by investments in fixed assets (on the demand side) and services (on the supply side).

On the minus there is a widening trade deficit and shrinking industrial production. The situation is stabilizing but that has lead to the population spending and sucking in imports faster than the rise in steel prices have been able to offset the difference.  In related news, Ukraine has had a good harvest bringing in more than 37mn tonnes of grain part of which can be exported and so help with the current account balance.

Reforms are the only way to accelerate the growth. The Rada has passed one of three crucial reforms in the first reading, a pension system reform. However, the other two – creation of a land market and setting up an independent anticorruption court – have both fallen by the wayside and now are unlikely to be addressed until after the presidential elections in 2019. In the meantime the country is left in limbo.

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