Page 5 - UKRRptJune18

somewhat slower than SP Advisors had anticipated with end-April CPI at 13.1%.
Inflation will slow further in the coming months as last year’s food price shock (adverse weather conditions) established a high base. This year’s weather is much better, which bodes well for agricultural products and food prices; these goods account for over 40% of the consumer basket.
The strength and relative stability of the hryvnia will also support a smooth deceleration of the CPI trend. Inflation is poised to slip below 10% in the summer, and SP Advisors see no major risks to our current end-2018 CPI forecast of 8.9% as long as no new shocks materialize (like a pre-election hike in the minimum wage).
The NBU has clearly signaled that any loosening of monetary policy is highly unlikely through the end of 2018 and the current policy rate looks sufficient to bring inflation back to the target range by mid-2019.
Market consensus expects the central bank will hold its rates steady. However, the NBU’s stance could change if major risks related to capital outflows or a loosening of fiscal policy were to emerge by the end of the year.
External sector risks remain manageable
Ukraine’s C/A deficit is expected to widen only marginally from last year’s $2.1bn, estimated at 1.9% of 2018F GDP. Although the growth in commodity imports is slightly outpacing exports (+8.6% y/y vs. +11.9% in 1Q, respectively) and the trade in goods deficit is set to widen to c. 9% of GDP, the services trade surplus and remittances will offset most of the gap.
FDI is set to be at c. 1% of GDP this year on the back of pre-election uncertainty and as privatization efforts have stalled. With a growing C/A gap and no FDI, the strength of Ukraine’s external position and the stability of the FX market are entirely dependent on the country’s ability to secure net inflows of debt capital to the state and private sector.
Needless to say, this will become increasingly difficult if Ukraine is unable to resume cooperation with the IMF. If there were to be no further inflows, scheduled redemptions of previous IMF loans and other external public debt would cut the NBU’s reserves from the current $18.4bn to below $15.0bn before the election in March 2019.
5 UKRAINE Country Report June 2018 www.intellinews.com