Economic studies
Ukraine

Ukraine

Population 42.5 million
GDP per capita 2,125 US$
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Synthesis

major macro economic indicators

  2014 2015  2016 (e) 2017 (f)
GDP growth (%) -6.6 -9.8 2.3 2.5
Inflation (yearly average) (%) 12.1 48.7 15.1 14.0
Budget balance (% GDP) -4.5 -1.2 -3.7 -3.0
Current account balance (% GDP) -4.0 -0.1 -1.0 0.5
Public debt (% GDP) 70.3 80.2 92.8 92.3

 

(e) Estimate (f) Forecast

STRENGTHS

  • Strategic location between Russia and the European Union
  • Considerable agricultural potential
  • Skilled and inexpensive labour
  • International financial support

WEAKNESSES

  • High degree of tension with Russia and inter-regional tensions threatening the integrity of the country
  • Extremely insecure political and social situation
  • Poor economic diversification
  • Excessive private sector borrowing and rapidly rising public indebtedness
  • Banking system seriously weakened by bad debt and lack of liquidity

RISK ASSESSMENT

Fragile recovery in economic activity in 2017

Ukrainian growth is expected to increase in 2017, driven by the agricultural sector (cereals) and the continuing rally in construction (non-residential property) begun in 2016. Industrial activity is, however, expected to remain constrained by the loss of production and export capacity in the separatist eastern regions (Donetsk and Lugansk), where a large part of the country's steel production and mines are concentrated. Investment is projected to continue to rise in 2017 after the increase observed in 2016 (+18% in Q2), encouraged by the loosening of monetary policy (interest rate cut from 22% to 14% between January and October 2016) and stronger household demand.

Despite the relatively high level of unemployment (10%), private consumption could be sustained by the abolition of employee social security contributions and a slight increase in wages (minimum wage raised by 10% in late 2016), the effect of which will, however, be dampened by inflation.

Tariff increases on some utilities (gas, heating, electricity) as well as higher prices for imported goods, especially fuel, sharpened by the persistent depreciation of the hryvnia, are expected to continue to push prices up in 2017. As in 2016, however, inflation will be substantially lower than in 2015.

The recovery of activity in 2017 will, in any case, still be subject to there being no further worsening of the situation in the eastern regions, and to a stabilisation of the political situation, necessary for the payment of international aid.

 

Very precarious financial situation

The agreement signed with the IMF should compel the State to better control spending, but wages, welfare and defence spending is likely to remain high. Moreover, debt servicing costs are rising because of higher interest rates and the depreciation of the hryvnia (70% of the debt is denominated in foreign currency). Tax receipts (75% of total revenues) are projected to rise, thanks to the modest economic recovery, the impact of higher taxes (on tobacco, alcohol, fuel) and to measures aimed at widening the tax base. The deficit is expected to narrow slightly. The government will, however, have to continue supporting the gas company Naftogas, weakened by accumulated arrears owed to its Russian supplier, Gazprom. The public debt is expected to be above 90% of GDP in 2017, maintaining a high risk of sovereign default.

Good agricultural harvests, the absence of another drop in the price for export products (cereals, fertiliser, steel products) and a slightly more favourable evolution of demand on some export markets (Russia, EU), could prevent another current account deficit. The slight increase in imports will, however, limit improvement in the balance.

Outflows of capital, associated notably with the repayment of maturing external debt (more than one billion USD in 2017), are projected to remain higher than incoming flows, impeded by uncertainties of developments in the political situation and the conflict in the east of the country.

The depreciation of the hryvnia (-8% against the dollar between January and November 2016) is therefore expected to continue, by how much depends, in particular, on the pace of reforms and developments of the situation in the eastern regions.

The level of foreign exchange reserves is low (around 3 months of imports). With access to the capital markets almost non-existent, the country depends heavily on international aid. The IMF released the third tranche (USD 1 billion) of its programme in September 2016, a year late, because of the slow pace of reform. Payment of the fourth tranche is subject to the adoption by parliament of the 2017 budget.

The banking system is very fragile, inadequately capitalised with 30% of loans being non-performing. On December 2016, the government nationalised the country’s largest bank, PrivatBank, facing serious liquidity problems.

 

Still major uncertainties over the development of the political situation and of the conflict in the east of the country

Petro Poroschenko was elected in the first round of the May 2014 elections, held following the dismissal of Viktor Yanukovych, triggered by the protest movements erupting in late 2013 (Maïdan). The two pro-western parties (the Bloc Petro Poroschenko-BPP and the People's Front-FP) have a large majority in the Assembly. Prime Minister Arensyi Yatsenyuk (FP) resigned in April 2016 and was replaced by a member of the presidential party (Volodymyr Groysman). Above and beyond the political differences, the new government will have to deal with the impatience of the population, which, for several months, has endured the consequences of the economic crisis. If there is no noticeable progress in this area, or in the fight against corruption, a deterioration in the social situation cannot be ruled out.

In the east of the country, the Minsk II agreement, signed in early 2015, helped ease the intensity of fighting between the Ukrainian army and the pro-Russian separatists, without bringing the conflict to an end. The situation is expected to remain unstable for a long time and overshadowed by a constant fear of sudden escalation.

 

Last update: January 2017

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