Page 5 - UKRRptJun21

1.0 Executive summary
Ukraine’s economy is recovering nicely and looks forward to strong growth in 2021, but a number of uncertainties remain.
The economy has begun to grow again, but Ukraine is still struggling with getting the coronavirus (COVID-19) under control and is prone to more waves of infection that will weigh on the recovery as it has been unable to source sufficient vaccines to inoculate the population.
The other danger is the ongoing conflict with Russia as the Kremlin is taking an increasingly hard line and appears to have given up on the Minsk II process. Russia has accelerated its issuing of passports to the locals, which will result in a frozen conflict that will go on for years. The hopes for a resolution to this problem in a timely manner have now been greatly reduced.
Ukraine’s economy will also be impacted by the sanctions proposed for Belarus following Belarus' president Alexander Lukashenko’s forced landing of the Ryanair flight on May 23 and the arrest of Roman Protasevich. Ukraine relies on Belarus for the supply of power, diesel fuel and potash all of which are likely to be blocked as a result of the fracas. It is unclear where else Ukraine can source these inputs as Russia would have been an alternative source and of course that is off the list. It is likely that Ukraine will have to exempt itself from the sanctions on Belarus regime, which adds new uncertainties.
Economic growth has returned, but Ukraine appears to be under performing and the outlook has recently been downgraded. Ukraine’s Ministry of Economy lowered its real GDP forecast to 4.1% y/y from 4.6% y/y for 2021 and to 3.8% y/y from 4.3% y/y for 2022, Interfax Ukraine reported on May 21 citing ex-minister Ihor Petrashko.
The ex-minister informed that the updated forecast would be used for developing a three-year Budget Declaration. Meanwhile, the drop of the economy in the first quarter of 2021 of 2.0% y/y was less severe than the ministry expected (-3.0% y/y). The average inflation in 2021 will amount to 8.8%, the ministry predicts.
Fixed investment in Ukraine in the first quarter of 2021 is slightly up from the same period a year earlier to UAH78,179mn from UAH76,914 respectively.
However, last year fixed investment was depressed by the multiple shocks the economy received and both years were significantly down by around a quarter from the 2018 results when UAH108,298mn was invested in the first quarter of that year.
While the economy is bouncing back that has yet to feed through into fixed investment which is needed to make the recovery sustainable and turn it into progress.
The government has no break-through economic strategy, and it is less risky to ground the country’s budget on a more conservative macroeconomic forecast. In addition, the accuracy of the economic outlook for 2021 is affected by the
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