Economic recovery in Ukraine will be sluggish in the years ahead. The country is stepping out of a prolonged period of economic contraction, having experienced two fully-fledged economic crises in the last seven years.
It is unlikely that the Ukrainian government will retake control of Crimea and Sevastopol, nor the occupied parts of the Donetsk and Luhansk regions.
Ukraine will only meet part of the major structural reforms that are required by the IMF through its financing package. The Ukrainian authorities have already removed most of the gas subsidies and also implemented pension reforms. However, fighting endemic corruption, reforming the judiciary, and improving the banking sector and the business environment will take a slow pace.
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 2016 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. Ethnic divisions in NE Ukraine not nearly as clear cut as Crimea, and it would benefit Putin to retain a large ethnic Russian influence in mainland Ukraine (enabling him to maintain a direct political stake in Ukrainian affairs). Moreover, Russia's shift of its attention to Syria will benefit Ukraine, whilst both Moscow and Kiev have urgent economic needs to end the fighting in eastern Ukraine.
Major Forecast Changes:
We have revised down our 2017 real GDP growth forecast from 2.8% y-o-y to 2.3%.
We have revised down our average hryvnia forecasts from UAH25.30/USD to UAH26.80/USD in 2016 and from UAH27.30/USD to UAH27.95/USD in 2017.
We now expect average inflation in 2016 and 2017 to come in at 14.5% y-o-y and 11.5%, down from our previous forecasts of 15.0% and 10.5%, respectively.
We have revised down our end of period policy rate forecast from 16.0% to 14.5% in 2016.
Key Risks :
The government has pursued a reform agenda, which has arguably achieved more than any other administration in Ukraine's post-Soviet period. However, continued support from the IMF remains contingent on the reform drive sustaining momentum. Faltering progress leads to delayed disbursals or could even lead to suspension of the programme. Such an outcome will have catastrophic implications for Ukraine, which has dangerously low FX reserves to maintain financial stability.
A poor harvest in 2015 will weaken corn and wheat exports in 2016 and 2017. In addition, Ukraine has lost nearly 50% of its steel production due to heavy fighting in the country's easternmost parts. Taking declining steel prices into account, overall exports will only recover moderately from the recent contraction in the years ahead. These developments are likely to put renewed pressure on Ukraine's current account deficit, as imports will be growing at a faster rate in 2016 and beyond.
The hryvnia devaluation in 2014 and 2015 has led to a sharp deterioration in bank asset quality, which will remain in a poor state for the foreseeable future. Weak government finances and low private interest will restrain more comprehensive recapitalisation. This will make more bank resolutions highly likely while private sector interest in recapitalisation is expected to remain low.
|f = BMI forecasts. Source: National Sources, BMI|
|Nominal GDP, USDbn||100.3||82.4||82.7||91.2|
|Real GDP growth, % y-o-y||-5.7||-9.9||0.9||2.3|
|Consumer price inflation, % y-o-y, eop||24.9||43.3||11.5||8.0|
|Exchange rate UAH/USD, eop||15.80||24.00||27.60||28.30|
|Budget balance, % of GDP||-4.5||-1.4||-3.9||-3.4|
|Current account balance, % of GDP||-4.6||-0.2||-1.0||-1.9|
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