Ukraine Country Report Aug19 - August, 2019

August 2, 2019

With Ukraine’s GDP expected to hit $150bn this year, the nation is on track to record 60% cumulative GDP growth since 2016, when it was $93.4bn. Over the last four years, the hryvnia dollar exchange rate has varied little, staying largely within a 25-26 band. In 2013, Ukraine’s GDP peaked in dollar terms at $183bn. But, from 2009 to 2013, the exchange was fixed at 8 hryvnia to the dollar, an artificially high rate.

The NBU has revised its economic growth forecast compared to the April macroeconomic forecast to 3% in 2019 (from 2.5%) and 3.2% in 2020 (from 2.9%) amid stronger domestic demand, more favorable terms of trade, and expectations of a larger harvest of grain crops.

Domestic demand will remain the main driver of economic growth over the coming years. Private consumption growth will decelerate, albeit remaining high owing to an increase in real household income – wages, pensions, and remittances from abroad. Capital investment will continue to grow rapidly, which will also provide significant support to the economy.

Economic growth will be dampened by a weak global economic activity and decrease in gas transit to European countries starting in 2020, due to the construction of bypassing gas pipelines.

The NBU has revised its economic growth forecast compared to the April macroeconomic forecast to 3% in 2019 (from 2.5%) and 3.2% in 2020 (from 2.9%) amid stronger domestic demand, more favorable terms of trade, and expectations of a larger harvest of grain crops.

Domestic demand will remain the main driver of economic growth over the coming years. Private consumption growth will decelerate, albeit remaining high owing to an increase in real household income – wages, pensions, and remittances from abroad. Capital investment will continue to grow rapidly, which will also provide significant support to the economy.

Economic growth will be dampened by a weak global economic activity and decrease in gas transit to European countries starting in 2020, due to the construction of bypassing gas pipelines.

In 2019, the current account deficit will narrow to 2.6% of GDP, thanks to the bumper grain harvest, a drop in energy prices, and a decline in dividend repatriation. In 2020-2021, the current account deficit will widen slightly, as a result of a decrease in natural gas transit, less favorable terms of trade, and stronger consumer and investment demand.

A delay in implementing key reforms or steps offsetting previous achievements (in particular, court rulings or legislative decisions) might increase the vulnerability of Ukraine’s economy and become an obstacle to further cooperation with the IMF. That could affect exchange rate and inflation expectations as well as the access to international capital markets as Ukraine will face a heavy debt load in the coming years.

The following risks also remain important:

● a suspension of Russian gas transit through Ukraine starting in 2020

● an escalation of trade wars and rising geopolitical tensions

● an escalation of the military conflict, and the imposition of new trade restrictions by Russia.

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