OUTLOOK 2019 Ukraine

OUTLOOK 2019 Ukraine
what's in store in 2019
By bne IntelliNews December 21, 2018

OUTLOOK 2019 Ukraine


The political agenda in Ukraine will be dominated in 2019 by the two elections, for president on March 31 and the Verkhovna Rada in October.

In December 2018 the polls put opposition leader, former prime minister and head of Batkivshchyna (Fatherland) party Yulia Tymoshenko clearly ahead, with the support of 21.2% of those that intend to vote and a ten point lead over her nearest challenger, showman Volodymyr Zelensky (11.6%). President Petro Poroshenko was in third place with 11%.

At this point it seems clear the election will go to a second round as none of the contestants have any realistic chance of winning more than 50% to clinch the race in the first round. While it seems highly likely Tymoshenko will progress to a second round that is preliminarily scheduled for April 21, Ukrainian polls are notoriously unreliable. Having said that it is widely assumed that given his access to state resources and ample funds Poroshenko will also be in the second round.

The bigger question is if the elections will be held at all. As 2018 came to a close all eyes were on the Ukrainian border where Poroshenko claimed Russian forces were massing for a Christmas attack. On the other side Russia’s Foreign Minister Sergei Lavrov claimed that Ukrainian forces were massing and planning a provocation in the same location.

The issue is if there is another incident following the naval clash between Russian and Ukrainian ships on the Sea of Azov on November 25 then martial law that was imposed the same day for 30 days will be extended. As December 31 is the opening of the official campaigning for the presidential elections on March 31, and the Ukrainian constitution bans any sort of electioneering during martial law, then another clash would means the election would either be delayed or cancelled entirely.

While the international commentators have been outraged by the Russian “attack” on Ukraine in the Sea of Azov, the Ukranians themselves have been a lot more skeptical. bne IntelliNews has suggested the naval clash might have been a provocation designed to boost Poroshenko’s flagging numbers at the polls – although there is not conclusive evidence to decide the issue. The locals are willing to accept that it could have been more Russian military aggression and are also very concerned about the war in the east, but they remain suspicious of the president’s motives.

Zenon Zawada of Concorde Capital summed up the thinking of many saying: “As for martial law in Ukraine, we still believe that Poroshenko wants to either extend it [at the end of December], or more likely renew it some time during the election campaign season leading up to the March 31 vote. And we believe this could be done without a full-scale Russian invasion, despite his insistence to the contrary. Whether he will try, or be allowed to do so, remains to be seen. Poroshenko has wide access to state resources, but doesn’t have control of the national police force. Martial law would give him the ability to use other law enforcement structures under his control – particularly the Security Service of Ukraine – to influence the elections.”

Whatever happens it seems clear that the tensions over Ukraine are unlikely to subside in the first half of 2019. A change of president may open the opportunity for new peace talks, but most analysts argue that after four years of war and over 10,000 killed in action in Donbas the Ukrainian population is unlikely to accept any form of appeasement with Russia and the political room for manoeuvre for a new president is very limited.

While a pro-Russian president is almost unthinkable, the results of the Rada election could also produce a sizeable pro-Russian opposition block that will lobby for a relaxing of the combative stance to all things Russian that Poroshenko and his eponymous block have followed over the last four years.


Poroshenko predicted that Ukraine would end 2018 with 4% growth, but with 3.4% growth in the third quarter the end of year result is likely to come in at something around 3.3%.

The economy remains battered by problems internal and external. What little business confidence there was took another hit in November following the clash in the Sea of Azov and the imposition of martial law. Ukraine has managed to attract only $1.9bn of foreign direct investment (FDI) in 2018 and needs investment several times larger to stage a recovery, investment that is unlikely to come when all the talk is of looming military invasion by Russia (which remains highly unlikely).

The International Monetary Fund (IMF) has downgraded its outlook for Ukrainian GDP growth in 2019-2020, the fund said in its World Economic Outlook report released on October 8. The fund lowered its estimate for the growth in Ukraine in 2019 to 2.7% from 3.3% projected in April. In addition, the IMF worsened the forecast for GDP growth in 2020 to 3.4% from 4%, but improved this figure for 2018, to 3.5% from 3.2%.

Local investment bank ICU Group also downgraded Ukraine’s growth prospects for 2019, predicting that GDP growth would end 2018 at 3.5%, up from 2.5% in 2017, but then the economy would slow again to 2.3% in 2019 due to a decrease in the fiscal stimulation of the economy and the weakening of foreign markets.

"In 2019, economic growth will slow down due to tight monetary and fiscal policies, as well as less attractive external conditions," Oleksandr Martynenko, the head of ICU’s financial analysis department, told reporters in Kyiv.

According to him, the main driver of growth will remain consumer demand, which is driven by an increase in real income and consumer lending, as well as remittances sent by Ukrainians from abroad.

According to ICU's estimates, Ukraine's dollar-denominated GDP will reach $131bn in 2018, up from $111bn in 2017, before rising to $145bn in 2019.

ICU also think the hryvnia will weaken somewhat in 2019. "Our baseline scenario for 2019 is a soft devaluation of up to UAH30 per $1 by the end of the year. Political instability and devaluation expectations carry major risks to our currency forecasts," the experts added.

Inflation has been a particular problem in 2018. The National Bank of Ukraine (NBU) has been tough on inflation and imposed a number of rate hikes, despite the crushing effect these had on growth. In the summer inflation fell back into single digits for the first time since 2016 to a low of 8.9% in July but by November it had ticked up to 10% again.

The NBU hiked rates three times in 2018 from 16% to end the year at 18%, and needs to start easing again if the economy’s growth is to accelerate. And that may be possible as the IMF’s inflation forecast in 2019 is for a faster fall in inflation down to 6.2% from earlier estimates of 6.5%.

The growing current account deficit is another cause of concern as exports falter, but imports rise on the back of the improving income of the population.

Ukraine had something of a trade shock in October 2018 when the trade deficit was two-thirds greater than during the same period a year earlier. Imports rose 17% to $47bn, while exports rose 10% to $39bn, pushing the deficit to almost $8bn. 

Part of the problem is imports from the EU were some $16bn in 10M18 whereas exports were only $14bn. Likewise, Ukraine is running a $2bn trade deficit with Russia, where exports to Russia were down 5% in the same period to about $2.4bn whereas imports from Russia were up 21% to $4.6bn. The de facto Russian blockade of Ukraine’s two important ports in the Sea of Azov has not helped this situation.

Finally the IMF worsened its forecast for unemployment in Ukraine for 2018 to 9.4% for the full year from 9.2%, and also in 2019 when the fund expects unemployment to be 9.2%.

Ukraine is the poorest country in Europe, according to the World Bank. However, incomes were rising in 2018 as the economic recovery from the collapse of 2015 starts to take hold. Real wages in Ukraine grew 14.2% y/y in October, accelerating from 12.9% y/y growth in September, the State Statistics Service reported on November 28. The average monthly nominal wage rose to UAH9,218 a month ($328) from UAH9,042 in September. Poroshenko told voters that he is confident that the average wage in Ukraine will grow to UAH10,000 ($350) in the first quarter of 2019.

The lack of job opportunities and the lowest levels of pay in Europe have seen some 5mn Ukrainians leave the country to look for work in its neighbours, who sent circa $10bn in remittances home in 2018. However, it seems this outflow has peaked and will be flat in 2019.

Nevertheless, the budget has improved. On November 23 the Verkhovna Rada adopted an IMF compliant national budget for 2019, with the deficit within 2.3% of the nation's GDP.

According to the finance ministry, the national budget revenues and expenditures were increased respectively to UAH1.019 trillion and UAH1.112 trillion, which is 11.8% and 12.1% higher than in the national budget for 2018. 

The upper limit of the state budget deficit in 2019 is set at UAH89.989bn, compared with UAH80.65bn this year, with an expected GDP growth of 3% and inflation of 7.4%.

In October, the IMF said that it forecasts Ukraine's budget deficit this year will amount to 2.5% of GDP, rising to 2.6% of GDP in 2019. It is then expected to decline to 2.3% of GDP in 2020, to 2.2% of GDP in 2021, to 2.2% of GDP in 2022 and to 2.1% of GDP in 2023.


The Ministry of Finance of Ukraine successfully placed $2bn of Eurobonds on October 21. As a result, the government should have enough FX funds to repay external debt through May 2019. 

Ukraine faces a two-year debt payment mountain of $17bn in 2019-2020, according to a central bank report on financial stability. The National Bank of Ukraine says the only way to avoid default is to stick to the IMF programme, which also unlocks low-interest loans from the EU and World Bank. Even with this multilateral help, Ukraine will have to sell Eurobonds to cover the year’s financing needs.

However, with the funding for the first half of 2019 covered and the new IMF deal due to kick in in December 2019, the government could get through 2019 with no new Eurobond issues at all if it government manages to raise enough concessional financing, Yuriy Butsa, Ukraine’s government commissioner for public debt management told Reuters on December 6.

The following year with at least $11bn of sovereign debt maturing will be more difficult, and assuming the IMF programme stays on track (which is not a given) then Ukraine says it is likely to return to the markets in the second half of 2019 with a new benchmark sized issue on the order of $2bn to refinance debt coming due in 2020.


On the business front there are four sectors to watch closely in 2019: agriculture, retail, transport, renewable energy and possibly energy in general.

Incomes are starting to rise again and the first thing Ukrainians do with cash in their pockets is go shopping. Already several large international retailers have announced plans to either expand their small existing operations or enter the market – which is an extremely encouraging sign. IKEA will open its first stores in 2019 in its third attempt to enter Ukraine. French supermarket chain Auchan will expand in Lviv in 2019 with its third store, hoping to repeat its enormous success in Russia. And France's sporting goods retailer Decathlon is going to open its first store in Ukraine in the first quarter of 2019. The local players will also be investing and the race to grab market share – that was a decade-long competition in Russia – has just begun in Ukraine.

Ukraine just brought in a record harvest of 70mn tonnes of grain and agriculture has long been one of the most attractive sectors in the country. The bluechip names that lead continue to invest and grow, but investing into these companies have been difficult and it remains a tight knit sector, while the equity market remains stunted. There have been some successful private equity deals in the agro-space, but until the government moves on genuine land ownership reform – that won’t happen in 2019 due to the elections – this sector remains largely un-investable.

Ukraine’s production of grain and oilseeds has doubled in less than two decades, according to the president of the Ukrainian Grain Association Nikolai Gorbachev. By July 1, 2019, the end of the marketing year, Ukraine should harvest 92mn tonnes of grain and oilseeds, compared to 42mn tonnes in 2001. The 50mn increase comes, he says, “despite the fact that we practically did not expand sown areas.”

Transport has boomed in the last two years, partly catalysed by the introduction of a visa-free travel deal with the EU. Passenger traffic both on airlines and through airports has exploded, and several of the international budget airlines led by Ryanair have moved into Ukraine. Indeed, Ryanair is talking about making Ukraine an operational hub and says it will invest $1.5bn into the country. Its Hungarian rival Wizz Air is talking about investing $2.5bn.  And Ukraine should have its own first domestic low-cost airlines flying domestic routes by the end 2018.

Renewable energy has taken off in Ukraine as it tries to break its dependence on imported Russia gas for energy, and Ukraine’s geography makes it an ideal location. The number of projects has therefore mushroomed, supported by tax breaks and IFI loans. Ukraine now has 2 gigawatts capacity of renewable energy in place, about 40% more than last year. About 60 foreign and national companies have proposed a total of another 2 gigawatts for the Chernobyl exclusion zone alone, an official from the Ecology and Natural Resources Ministry told the EU-Ukraine Renewable Energy Investment Forum. Sergiy Savchuk, head of the State Agency on Energy Savings, said: “Prospects for renewables are very good, very shining.”

More than $1.7bn has been invested in renewable energy projects in Ukraine since 2015, according to Savchuk. A promising area for investors, he said, is recycling garbage, a process that could annually replace the equivalent to 1bn cubic metres (cm) of gas. However, bne IntelliNews sources report that potential investment has been stymied by the endemic corruption as municipal government deals to sell garbage for cash is as lucrative a scam as elsewhere, so institutional resistance to projects is high. Corruption pervades everything and remains the main obstacle for investors to overcome.

And finally, the government is hoping to promote investment into boosting domestic gas production. Ukraine has two traditional gas deposits in the east and west of the country that are exploited by the national gas company Naftogaz and it already produces some 20bn cm a year that covers 65% of the domestic demand.

However, the country is also home to Europe’s third largest shale gas deposits in the massive Lublin basin that it shares with Poland. The potential for domestic production to cover all the country’s domestic needs are huge and largely untapped.

The big prize in the energy sector will be the possible privatisation of Centrenergo, the power utility that serves the capital Kyiv and its environs. The government was to offer a 78.289% stake in the company with a starting price of UAH5.98bn ($215mn), but the auction was cancelled in December after it emerged that the most likely winner was going to be Kyiv-based Ukrdoninvest that is controlled by Vitaliy Kropachev, a businessman connected to Poroshenko. This would have been the largest privatisation of the year, but it is unclear when the company will be offered again, though it should be at the top of the privatisation list for 2019.