Ukraine’s government forecasts GDP growth of 3%-4% in 2014-2016.

By bne IntelliNews June 5, 2013

The government forecasts GDP growth of 3%-4% y/y in 2014-2016, reads the project called “Forecasts of Ukraine’s economic development and macro indicators for 2014-2016” prepared by the cabinet. According to it, Ukrainian economy can grow by 3% next year (the forecast is already used in the preparation of the 2014 budget). The 3% growth rate assumes gradual recovery of global economy. In this case, Ukraine’s nominal GDP will reach UAH 1.63tn, with inflation of 4.3%. However, even this level of inflation is considered high on the background of almost two years of consumer deflation. The resumption of inflationary trend, according to EconMin, will highly affect incomes of the population - the real wages will grow by only 3.2% (UAH 3,600).

The optimistic scenario assumes global economy growth of 4% (eurozone and Russia). This may allow the country to increase exports of goods and services by 2.7%, in particular thanks to the "significant grain harvest" (52.8mn tonnes) as well as to the national currency exchange rate fluctuations. The government forecasts the average annual hryvnia exchange rate to reach 8.7 UAH/USD by the year end.

However, not all the sectors of the economy will show significant growth, the cabinet notes. Against the background of nearly 2% drop in steel prices, metallurgical industry can grow only by 1.5% next year.

At the same time, investment inflows-both foreign and domestic-should have positive impact on domestic economy. By reducing the tax rate from 19% to 16% it is expected to free up funds which, the government believes, can become capital investments. The share of equity investment is expected to grow from 60.2% to 62.1% over the next year.
The government expects imports to grow by 1.1% due to slight decline in gas prices, however, not because of a possible revision of the contract with Gazprom, but thanks to a drop in world oil prices (4%-5%). In this case, the foreign trade deficit will be reduced to USD 12.7bn.

At the same time, the government is considering an alternative scenario of more rapid growth of the world economy - by 4.4%. In this case, investment in Ukrainian economy might grow to USD 7.7bn (USD 6bn in 2012), steel prices may increase by 3-4%, which, in turn, will accelerate the growth of both the Ukrainian economy (up to 4%) and inflation (up to 5.2%).
Already in 2015-2016, the government expects further acceleration of economic growth by 4%-5.5%. At the same time, EconMin recognizes the existence of risks that can threaten the forecasts of the government. The cabinet acknowledges the probability of enhancement of negative developments in the external markets, as well as the possibility of a sharp rise in energy prices in the event of military actions in the Middle East. Also, there are domestic risks: the probability of limited crediting of economy because of declining trust of foreign investors in Ukrainian politics and reforms.

Among the factors that will influence Ukraine, but are hardly taken into account by the government, remain additional opportunities for the economy offered by trade liberalization with the EU.

Standard & Poor's expects a GDP growth rate of 1% in Ukraine in 2013 under optimistic scenario. Under the pessimistic scenario, GDP growth in Ukraine in 2013 will be around 0.5%. The inflation rate in Ukraine in 2013 will be 2.6%, the current-account deficit of the balance of payments will be 8.2% of the GDP, and the state budget deficit will be 5% of the GDP.

The EBRD forecasts GDP to decline by 0.5% y/y in 2013. The IMF forecasts zero GDP growth in  2013. In early April, the World Bank has worsened Ukraine’s GDP growth forecast from 3.5% y/y to 1% y/y in 2013. The inflation forecast was improved from 9.5% to 8.7% for 2013.

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