Page 6 - bne IntelliNews Country Report: Ukraine Dec17

Inflation slowed to 14.6% in September, but it remains well above the NBU’s 8% +/-2% target range for the end of 2017.
Growth in food prices remains the largest single factor behind the overshoot (food accounts for 40% of the consumer basket). That growth has been driven by two factors: poor weather conditions earlier in the year undercut the fruit and vegetable harvest, while growing exports of agricultural products have kept meat and dairy prices elevated.
The effect of these temporary factors will slowly fade until the next harvest, which will push CPI lower as long as the weather shock is not repeated.
Meanwhile a new risk to inflation is emerging – the government’s continued upward revision of pensions (+23% on average since October) and minimum wages (expected one-off increase of 16% since the start of 2018).
Salaries in the private sector are being driven higher by competition for quality labour. All of this adds up to stronger demand and the consequent inflationary pressures. A pick-up in core inflation to 8.1% at the end of October underscores that pull factors will be an issue in 2018.
In response to that outlook, the NBU increased the key policy rate by 1pp to 13.5% in late October. We see inflation decelerating to 12.7% by end-2017. The probability of a CPI slowdown to within the NBU’s 2018 target range of 6% +/-2pp is high, as long as monetary policy remains tough and no external shocks occur.
The C/A balance dipped in September on a $0.5bn sovereign Eurobond coupon payment, but the 9M17 tally widened by only $0.3bn y/y to $3.0bn. Growth in imports of goods marginally outpaced exports (21.9% vs. 20.7%) as Ukraine shifted the purchase of natural gas (the country’s largest single import item) for the winter season to 2Q and 3Q from last year’s 4Q purchases.
The C/A deficit is projected at 3.5%-4.0% of 2017E GDP, broadly unchanged from 2016. While heavy consumer and investment imports will keep imports growing in 2018, the increase should be offset by higher sales from the recovering industrial sector.
Financial account inflows spiked by $1.3bn on a Eurobond placement in September, representing the portion of proceeds exceeding the $1.7bn used to refinance debt maturing in 2019-2020.
The FX market has stabilized after the hryvnia’s 3% depreciation over the third quarter and October. The NBU intervened a few times to signal its support, but the central bank remains broadly committed to the flexible exchange rate policy.
The prospects for a continuation of lending under the IMF program look slim over the next half-year. The government’s credibility has been heavily undermined after it failed to hike household gas prices in October. Even if gas prices are raised next spring after the end of the heating season, the IMF is unlikely to be satisfied and is likely to request a long list of prior actions rather than focus on structural benchmarks, which the government has frequently ignored.
6 UKRAINE Country Report December 2017 www.intellinews.com