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SigmaBleyzer: Macroeconomic Situation in Ukraine
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18 September 2012
• Further deterioration in the external environment hit the Ukrainian economy in June: industrial production fell by 1.4%
yoy and exports dropped by 11.3% yoy in US Dollar terms.
• Robust domestic consumption and acceleration in agriculture supported real sector performance in June.
• Consumer prices fell for the third month in a row in July.
• The National Bank of Ukraine continued to support a strong Hryvnia peg to the US Dollar through sizable foreign
exchange interventions and maintaining tight banking liquidity.
• Tight liquidity led to a notable increase in the cost of borrowing for the private sector, further undermining credit growth.
• Due to a wider current account deficit and larger external debt repayments, Ukraine’s BoPs switched to a $1.5 billion
deficit in June, but may turn into a surplus by next month thanks to a $2 billion sovereign Eurobonds placement.
• Ukraine reported a 40% yoy lower state budget deficit in 1H 2012 thanks to strong budget revenue growth and control
over non-social expenditures. At the same time, public finances will remain under pressure in the short-term, requiring
solid fiscal consolidation measures after the elections.
Executive Summary
According to early State Statistics Committee of Ukraine
estimates, real GDP growth accelerated to 3% yoy in 2Q 2012,
up from 2% yoy in the previous quarter. The acceleration
may be attributed to stronger private consumption, an
earlier harvesting campaign and co-hosting of the Euro-
2012 football championship. Thus, loose fiscal policy and
record low inflation underpinned a 16.5% yoy increase in
real wages in 2Q 2012 compared to about 14.7% yoy in 1Q
2012. Thanks to strong real wage growth and the European
football tournament held in June, retail sales picked up by
16% yoy over January-June 2012, while output production in
food processing maintained growth momentum, advancing
by 3% yoy in June.
Agriculture production, which was up by 28% yoy in June
compared with 2.5% yoy a month before, helped offset
weaker construction and industrial sector performance. With
the completion of infrastructure upgrade projects related to
the Euro-2012 football championship, construction declined
by almost 9% yoy in June 2012. Renewed Eurozone sovereign
debt woes and slowing world economic growth weighed
on world commodity prices, which fell sharply in June. In
addition, domestic lending remains sluggish, constraining
economic activity. As a result, Ukraine’s industrial production
declined by 1.4% yoy in June on weaker performance of
export-oriented and capital intensive industries. Thus,
the chemical industry lost steam, expanding by about 6%
yoy in June from almost 15% yoy a month before. Output
in metallurgy, machine building and manufacturing of
construction materials fell by about 1% yoy, 9% yoy and 5%
yoy in June, respectively. Although robust domestic demand
will continue to support economic growth through the rest of
the year, due to a more subdued global growth outlook in 2H
2012 and sluggish domestic credit growth than we initially
expected, real GDP growth is forecast at around 2% yoy in
2012.
Ukraine witnessed a drop in its consumer prices in July, for the
third consecutive month. In annual terms, however, the index
fell by 0.1% in July compared to 1.2% the previous month.
Slower decline may be attributed to an easing favorable
statistical base impact on food prices and increases in
railway transportation and phone service tariffs. Considering
price developments from January to July 2012, our year-end inflation forecast was adjusted downwards to 6% yoy.
May-July 2012 showed that within the NBU’s complex policy
mix of stimulating anemic credit growth and maintaining
the Hryvnia exchange rate peg to the US Dollar, the latter
target has prevalence over the former. To contain currency
movements in July, the NBU continued to intervene in the
foreign exchange market by selling almost $1.2 billion of
its international reserves on a net basis and keeping banking
sector liquidity tight. Liquidity constraints and high credit
risks pressured credit rates upwards and affected credit
availability for the real sector. The stock of bank credit grew
by only 3.8% yoy in June and was only 0.1% higher since the
beginning of the year.
The Balance of Payments switched to a $1.5 billion deficit in
June amid higher external debt repayments and a worsened
current account. While a deficit on the financial account was
anticipated, the deterioration in the current account balance
was sharper than expected. Weaker overseas demand and
falling world commodity prices caused deep declines in
exports of metals, chemicals and mineral products, which
together accounts for more than half of Ukraine’s exports.
Although agricultural exports kept growing at a solid pace,
total export of goods fell by 11% yoy in US Dollar terms in
June compared to a 9.6% yoy increase the previous month. A
financial account balance is expected to turn into a surplus by
July thanks to successful issuance of $2 billion of sovereign
Eurobonds. Despite a favorable near-term outlook, Ukraine’s
BoPs will remain under pressure in the short and medium
term due to high external financing needs amid a challenging
external environment.
At the beginning of 2Q 2012, Ukraine amended its state budget
law to implement generous social spending increases. Unlike
expectations, compensatory measures, such as a wealth tax,
were not introduced. However, robust revenue growth and
control over ‘non-social’ expenditures helped keep the state
budget deficit 40% lower in 1H 2012 than in the respective
period last year. Near-term fiscal financing needs have eased
thanks to robust privatization receipts, a $2 billion Eurobond
issuance and a VTB loan rollover. However, public finances
are likely to remain strained in the short-term as the annual
state budget revenue target looks overly optimistic, given
slower economic growth and inflation than projected by the government, reliance on NBU profit transfers to the budget, and
expected acceleration in expenditures through the end of the year. A notable increase in state budget guarantees at the end of
July adds to fiscal sustainability concerns. Hence, solid fiscal consolidation measures will be needed to ease these concerns
after the elections.
Source: USUBC
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