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Ukraine Business Forecast Report Q3 2011 Published on June 2011
Report Summary Core Views Ukraine's economic recovery has picked up steam faster than we had expected (we had initially pencilled in a modest slowdown in economic growth for 2011) and is becoming more broad-based. The initial export and fiscal stimulus driven recovery has been buttressed by investment expenditure and household demand. We believe that Ukraine will ultimately undertake the reforms spelled out under its US $15.9bn Stand-By Arrangement with the IMF. Continued cooperation with the IMF is crucial to anchoring confidence in Ukraine's economy and underpinning macroeconomic stability, and this should spur policymakers. With no elections on the calendar until October 2012, Ukraine is enjoying its longest-election free period since before the 2004 Orange Revolution. President Viktor Yanukovich is likely to continue a process of consolidating political power in the presidential office while allowing lower-ranked deputies in the legislative branch of government to take the heat for politically unpopular reforms. We caution that the as yet unresolved issues of fiscal consolidation and pension reform could strike a cord with domestic voters and breathe new life into the opposition, which has struggled to find a catalysing issue. Major Forecast Changes We have upgraded our 2011 real GDP growth forecast to 4.4% after an exceptionally strong Q111 growth figure. Household consumption, buoyed by rising real wages, has made a stronger than expected recovery and this ultimately underpins the rationale behind the upgrade in our forecast. In line with greater expectations for domestic demand, we have also revised upwards our expectations for Ukraine's current account deficit, now seeing the shortfall ring in at 3.4% of GDP (up from 2.3% previously).
Key Risks To Outlook To us, the key risk to our outlook for Ukraine stems from the possibility that returning economic growth saps momentum for the reforms mandated under the government's IMF agreement. A breakdown in relations with the IMF would significantly dampen the outlook for Ukraine both in the short term through capital flight risks, and over the long term as structural reforms fall by the wayside.
Table of Content Executive Summary... 5 Core Views..5 Major Forecast Changes ......5 Key Risks To Outlook .5 Chapter 1: Political Outlook 7 SWOT Analysis. 7 BMI Political Risk Ratings. 7 Domestic Politics...... 8 IMF Agreement Expected But Risks Still Rising We view the risk of a breakdown in relations between Kiev and the IMF as having risen well above the level that could be considered non-negligible.
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>> Get this Report Now by email! Foreign Policy... 9 Tough Choices Ahead For Kiev Political tensions are rising between Ukraine and Russia, as the former moves into the concluding stages of negotiations regarding its Deep and Comprehensive Free Trade Agreement (DCFTA ) with the European Union. TABLE: Political Overview 12 Long-Term Political Outlook.... 13 At A Political Crossroads Ukraine's long-term political trajectory is far from certain, with the coming years likely to prove crucial to the country's convergence prospects through 2020. Chapter 2: Economic Outlook.... 17 SWOT Analysis........ 17 BMI Economic Risk Ratings..... 17 Economic Activity... 18 Investment, Consumption Lead To Forecast Revision We are revising up our 2011 real GDP growth forecast for Ukraine to 4.4% (from 3.6% previously). TABLE: ECONOMIC ACTIVITY.. 18 Fiscal Policy .. 20 Fiscal Position Improving But Reforms Lacking..20 Accelerating economic expansion in Ukraine has seen us revise upwards our expectations for revenue growth in 2011. TABLE: FISCAL POLICY... 20 Monetary Policy....... 22 Food, Fuel To Drive Inflation Higher We expect consumer price inflation to continue ticking higher over the course of 2011, seeing the headline rate hit 14.0% by end-year. TABLE: MONETARY POLICY.... 22 Balance of Payments....... 23 Household Consumption To Push C/A Wider We are revising upwards our 2011 current account deficit for Ukraine to 3.4% of GDP (from 2.3% previously). TABLE: current account... 24 Banking Sector........ 26 Gradual Improvement But Vulnerabilities Remain In line with an improving macroeconomic picture, we are modestly upgrading our outlook for Ukraine's commercial banking sector in 2011. Chapter 3: 10-Year Forecast...... 29 The Ukrainian Economy To 2020...... 29 Convergence Delayed, But Still In Play.......29 Ukraine's economy is set to enter a period of relatively stagnant growth on the heels of the 2008-2009 global financial crisis, with the private sector likely to encounter prolonged difficulty tapping international financial capital markets, which we believe will anchor trend growth on a much lower trajectory over the long term. TABLE: UKRAINE Long-Term Macroeconomic Forecasts...... 29 Chapter 4: Business Environment...... 33 SWOT Analysis........ 33 BMI Business Environment Risk Ratings.. 33 Business Environment ... 34 Institutions ..... 34 TABLE: BMI Business And Operation Risk Ratings 34 TABLE: BMI Legal Framework Rating...... 35
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>> Get this Report Now by email! Infrastructure . 36 Market Orientation .. 37 TABLE: Labour Force Quality.. 37 TABLE: Emerging Europe ' Annual FDI Inflows..... 38 TABLE: Trade And Investment Ratings.... 39 TABLE: TOP EXPORT DESTINATIONS ...... 40 Operational Risk ..... 41 Chapter 5: Key Sectors..... 43 Autos...... 43 TABLE: Ukraine Vehicle Production ' Historical Data & Forecasts........ 45 TABLE: Ukraine Vehicle Sales ' Historical Data & Forecasts.. 46 Food and Drink........ 47 TABLE: Food Consumption Indicators ' Historical Data & Forecasts..... 49 Other Key Sectors... 51 TABLE: Infrastructure Sector Key Indicators... 51 TABLE: Defence and Security Sector Key Indicators 51 TABLE: PHARMACEUTICALS Sector Key Indicators 51 TABLE: Oil and Gas Sector Key Indicators.... 51 TABLE: Telecoms Sector Key Indicators....... 52 TABLE: FREIGHT Sector Key Indicators... 52 Chapter 6: BMI Global Assumptions.. 53 Global Outlook 53 US Slows Down As Eurozone Picks Up TABLE: GLOBAL ASSUMPTIONS ...... 53 TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST (% chg y-o-y)........ 54 TABLE: REAL GDP GROWTH ' BLOOMBERG CONSENSUS FORECASTS . 54 TABLE: EMERGING MARKETS AGGREGATE GROWTH (% chg y-o-y)...... 55
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