Page 5 - UKRRptOct18

1.0 Executive summary
Ukraine’s economy seems to have passed bottom and is starting to gather some momentum. Inflation is falling after the central bank hiked rates twice this year, unemployment is down to 8.3% from double digits earlier, banks are back in profit, incomes are starting to rise and that is feeding through into imports and consumption, and the state external debt has also dropped to 64% -- all good signs.
Growth is recovering albeit well below the post-crisis potential. Ukraine's state statistics service Ukrstat has revised upwards the nation's GDP growth from 3.6% year-on-year in April-June to 3.8% y/y.
In July, the National Bank of Ukraine (NBU) revised the nation's 2019 GDP growth forecast to 2.5% year-on-year (vs 2.9% y/y in the previous forecast) due to the waning effects of higher social standards, the tight monetary conditions required to bring inflation back to its target, as well as tight fiscal policy resulting from the need to repay large volumes of public debt.
In 2020, the real economy is expected to grow by 2.9% y/y. "Private consumption, additionally supported by rising remittances thanks to an increase in the number of labour migrants, will remain the main driver of economic growth in the medium-term," the NBU believes.
Meanwhile, investment growth will be restrained by businesses’ higher labour costs. However, the contribution of net exports will remain negative over the forecast horizon, as imports will satisfy a significant portion of domestic demand and capital investment needs, according to the regulator.
The problems that remain are many. Putting aside the small scale war in the east of the country that show no sign of ending, the National Bank of Ukraine (NBU) decision to hike rates in the last two months is both encouraging and a problem. It's a problem as the high cost of borrowing kills growth and investment, but its encouraging as it shows the NBU remains independent from government just as election season gets going and the temptation to spend widely is high.
Money remains short and relations with the IMF are still very chilly. An IMF team were in Kyiv in September to negotiate the release of the next $1.9bn and while a deal was widely anticipated none appeared. The government seems to have signed off on a IMF compliant gas tariff hike – one of the key conditions – but the argument now is over the budget: Kyiv wants to use the next tranche to support budget spending ahead of the elections, while the IMF wants the money to be kept in reserves to support the currency.
And Ukraine badly needs the IMF money. Reserves have fallen to $17.7bn, which is less than the three months of import cover regarded as necessary to keep the hryvnia stable and the currency has already slid a little as a result to around UAH29 to the dollar. But with $3.8bn in debt to redeem in total this year and another $7bn next year the government cannot finance its obligations without the IMF’s help. The IMF says it will not release the money until the 2019 budget law is passed, due in the last months of this year.
5 UKRAINE Country Report October 2018 www.intellinews.com