Page 5 - UKRRptSept18

1.0 Executive summary
The Ukrainian economy is growing at a healthy rate, slightly ahead of analysts expectations, but still well below its potential especially following such a deep contraction in 2015. However, GDP growth will slow in 2019 as political uncertainty takes hold ahead of presidential and parliamentary elections next year.
Inflation has slowed on the back of a bumper harvest , but fundamental downside pressures are persisting, prompting the NBU to keep its monetary policy tight. The central bank has been forced to hike rates despite the cooling effect this has had on already lackluster growth.
The FX market has been turbulent in August and the hryvnia has dipped to close to UAH28 to the dollar. The absence of official external funding is a notable risk that could aggravate the situation rapidly in the coming months and a full blown currency crisis is possible in the autumn.
The return of the IMF and disbursement of a new loan tranche is critical for the economy to function smoothly through the end of 2019. The IMF mission will visit Ukraine in September and it’s hard to overestimate the importance of that visit.
GDP growth picked up to 3.6% y/y in Q2 (+0.9% q/q, seasonally adjusted), beating the market’s expectations. An early start to the harvest campaign and the resulting increase in crop production partially explains the pick-up.
The second quarter growth was broadly even across the economy, with trade (+ 5.7% y/y) the one outperformer that is consistently outpacing other key sectors. That robust trend is largely being driven by growing consumer and investment imports.
On the demand side, the growth is mainly supported by private household consumption . Rapid growth in nominal incomes (salaries grew 26% y/y in 1H18) and migrant remittances (estimated at more than +30% growth y/y in 1H) against decelerating inflation is fueling increased spending.
Consumer confidence is also improving – the GfK index rose 6.2 points y/y to 65.6 in June. Investment demand has remained robust as companies focus on maintenance capex after the 2014-16 crisis.
However, new greenfield investments will be limited given the substantial political uncertainty ahead of the March 2019 presidential election. SP Advisors have upgraded its 2018 GDP growth forecast to 3.4% y/y from 3.1% previously. However, in 2019, weaker consumer and investment spending will depress GDP growth to below 3%.
5 UKRAINE Country Report September 2018 www.intellinews.com