Page 5 - UKRRptDec18

1.0 Executive summary
As the report goes to press Ukraine’s navy clashed with Russia’s in the Kerch straights on November 25 and the government has imposed martial law for 30 days. The new IMF deal is not in danger and the economic impact is expected to be minimum.
The immediate crisis for Ukraine has been avoided with the proposed new IMF stand by agreement worth $3.9bn. This together with a $2bn Eurobond rushed out shortly after the IMF deal announcement means Ukraine has its funding needs covered until the middle of 2019.
However, the IMF deal still needs to be approved by the fund’s board of directors, however at the time of writing this seems to be a formality. However, the government needs to stick to other promises such as hiking domestic gas tariffs by 23.5%. Only then will the next tranche of IMF money – worth between $1bn and $1.9bn – be release, possibly before the end of 2018.
Economic growth remains robust at above 3%, although the growth fell back from 3.8% in the second quarter to a disappointing 3.1% in the third quarter. While the positive growth is welcome Ukraine economy is still growing at well below potential, due to a number of factors including the very low levels of investment and a war with Russia.
At street level the slow recovering in incomes is driving consumption.
Growth in nominal salaries continues to hover above 20% y/y – a direct result of the fierce competition for qualified and unqualified labour. Surging salaries are adding to price pressures in many service segments.
Domestic-oriented sectors are growing at a healthy pace – in particular, retail sales continue to grow more than 5% y/y in real terms. Private household demand will remain the key growth driver in the near term; however, imports will cover much of that demand.
Unexpectedly, the current account deficit widened recently, leading to a downgrade for the outlook for the full year current account shortfall of 3.8% of GDP from 2.1% previously. The 12-month trailing deficit is $4.8bn, nearly 3.7% of GDP.
The widening of the C/A gap in recent months is related in large part to greater imports of consumer goods. Importers have increased purchases in anticipation of a seasonal depreciation of the hryvnia – typical for the 4Q. This, in turn, shifted the weakening of the hryvnia to the summer months.
High inflation is also a problem , although the tough action by the National Bank of Ukraine (NBU) has brought inflation almost back into single digits. Inflation was expected to accelerate in the last months of this year on the back of rising food prices and by buoyant private demand to near 10%.
Finally politics is now dominating as the 2019 presidential elections approach. At time of writing it looks most likely that Yulia Tymoshenko will win the presidency from Petro Poroshenko as she has a ten point lead over the current president and has added a few points in the last month. The strings
5 UKRAINE Country Report December 2018 www.intellinews.com