MAJOR MACRO ECONOMIC INDICATORS
|2013||2014||2015 (f)||2016 (f)|
|GDP growth (%)||0.0||-6.6||-9.9||-3.0|
|Inflation (yearly average) (%)||-0.3||12.1||50.0||20.0|
|Budget balance* (% GDP)||-4.8||-4.5||-4.2||-3.7|
|Current account balance (% GDP)||-9.2||-4.0||-6.6||-3.0|
|Public debt (% GDP)||40.7||71.2||94.4||92.1|
(e) Estimate (f) Forecast
- Strategic position between Russia and the European Union
- Great agricultural potential
- Qualified and inexpensive labour
- High degree of tension with Russia and inter-regional tensions threatening the integrity of the country
- Extremely insecure political and social situation
- Low economic diversification and dependency on the prices of metals and the price of imported gas
- Excessive borrowing in the private sector and rapid increase in public indebtedness
- Banking system seriously weakened by bad debt and lack of liquidity
Ukrainian economic activity is likely to continue contracting in 2016
Industrial activity is expected to remain very limited in 2016, as a result of the loss of the production and export capacities located in the two separatist provinces in the east (Donetsk and Lugansk), where a large percentage of the country’s steel production facilities and coal mines are concentrated. Agricultural production (maize, wheat) could suffer as a result of the drought that hit the country at the end of 2015. In addition, household consumption is likely to remain shackled by the highly restrictive budget policy, rapid inflation and, as with investment, by the prohibitive cost of credit (22% in November 2015). The decline in agricultural production is also likely to limit any increase in exports, which is therefore unlikely to make any positive contribution to GDP in 2016.
Consumer prices are expected to continue rising in 2016, but less strongly than in 2015, as a result of the slowing in energy (gas) price rises and the depreciation of the hryvnia against the dollar. Inflationary dangers remain significant and will thus limit any chances of substantial cuts to interest rates.
An extremely precarious financial situation despite improving public finances
Budget revenues are likely to be held in check by the weakness in economic activity, despite the rise in taxes (tobacco, alcohol, fuel) agreed in the 2016 budget. The government will also have to continue supporting Naftogas, the gas company struggling because of the accumulated arrears owed to its Russian supplier, Gazprom. The severe measures implemented to control spending (lower spending, particularly social and reduced energy subsidies) should, however, help bring the deficit down in 2016. The public debt should remain above 90% of GDP in 2016.
The improvements to the current account deficit should continue in 2016, without any significant recovery in imports. Exports, however, are once again likely to be held in check by the slow growth of production and the prices of leading export products (steel, coal, agricultural raw materials).
Despite the increase in 2015, linked with the IMF aid payment, currency reserves remain low (barely 3 months’ imports) and access to capital markets almost non-existent, for either the State or companies and banks. An agreement signed in October 2015 includes a 20% reduction in the sovereign debt held by private creditors (3.6 billion out of a total of USD 18 billion) and the rescheduling of the balance. The USD 3 billion Eurobond subscribed by Russia late 2013 hasn’t been included in this agreement and Ukraine didn’t pay the bond on due date (December 20). This default on an “official” debt, doesn’t affect IMF aid payments, given the change, agreed mid-December, in rules preventing any IMF support for countries in arrears on official loans. Whereas t its rescheduling proposal (over 3 years without any reduction in the debt) has been rejected by Kiev, Moscow may bring the case to court. Exchange controls, together with a degree of calm in the Eastern regions, allowed the hryvnia to achieve relative stability as of March 2015. Downward pressures are expected to diminish in 2016. However, further depreciation cannot be ruled out, in particular if there is any deterioration in the political situation. It would further increase the public debt (60% denominated in currencies), as well as those of companies and banks, both saddled with large currency debts.
The banking system is extremely fragile and inadequately capitalised, with a level of non-performing loans of around 40%.
Serious tensions in the east of the country add to the potential for political instability
P. Poroshenko was elected in the first round of the Presidential elections in May 2014, held following the dismissal of V. Yanukovych triggered by the protest movements that erupted at the end of 2013. The two pro-western parties (the Bloc Petro Poroshenko-BPP and People’s Front-NF, party of the Prime Minister A. Yatsenyuk) have a majority of seats in parliament. However, differences within the government coalition, consisting of five pro-European parties, are leading to concerns about its longevity. The BPP won the local elections in October 2015 for which the NF, lacking sufficient public support had not presented any candidate. Social discontent is growing in the face of the significantly worsening economic situation and the overly slow pace of the reforms, particularly those fighting corruption.
In the east, the Minsk II agreement, signed at the beginning of 2015, helped diminish the intensity of fighting between the Ukrainian army and the pro-Russian separatist movements. The situation remains nonetheless resolutely unstable, overshadowed by the constant fear of a sudden escalation.
Last update: January 2016