Coface Group
Ukraine

Ukraine

Population 42.2 million
GDP per capita 2,656 US$
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Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 2.4 2.5 3.3 2.8
Inflation (yearly average, %) 13.9 14.4 11.0 9.0
Budget balance (% GDP) -2.2 -2.2 -2.1 -2.3
Current account balance (% GDP) -1.5 -2.2 -3.3 -3.2
Public debt (% GDP) 81.2 72.0 64.0 60.0

(e): Estimate. (f): Forecast.

STRENGTHS

  • Strategic position in Europe
  • Association and free trade agreements with the European Union
  • Significant agricultural and metallurgical potential
  • Skilled and low-cost labour force
  • International financial and political support

WEAKNESSES

  • Conflict with Russia and Russian-speaking populations with severed territorial integrity; Russian counter-sanctions
  • Political and social instability against a backdrop of widespread poverty, corruption and oligarchy
  • Low economic diversification
  • High public and external debt
  • Credit constrained by doubtful loans (40%), with high interest rates
  • Managed float of the hryvnia; restrictions on capital movements limit convertibility

RISK ASSESSMENT

Declining momentum and return to moderate growth in 2019

Although less robust than in 2018, growth will still be driven by domestic demand. Household consumption (69% of GDP) will remain the main contributor. Wages will continue to rise against the backdrop of emigration and a scarcity of skilled labour, but also because of the continued increase in the minimum wage in the lead-up to elections. Households will also benefit from expatriate remittances, which make up 10% of their income. An estimated five million Ukrainians work abroad, or one quarter of the working population. Despite the 23.5% increase in gas prices on the 1st November 2018, inflation could be lower due to the slower pace of the hryvnia’s depreciation and calmer food prices. Consumption will benefit trade and freight transport. Investment may increase less briskly: its share in GDP (16%) is not growing much due to the conflict with Russia and the poor business climate, as well as credit, which is constrained by its high cost, with real interest rates at 8% in July 2019. Public investment in upgrading and extending the poor quality road network could suffer from fiscal tightening. Trade’s contribution is expected to stay negative, with exports continuing to be affected by the fall in iron and steel prices (25% of total exports) and softer world demand owing to trade disputes. Agri-food exports (45%), including cereals (wheat, barley, rapeseed, sunflower, maize), will probably have to contend with stable prices and limited available quantities after an average 2018 harvest.

 

External vulnerability and conditional international financial support

Despite the reduction accorded by creditors in 2015-16 and the favourable impact of growth and the primary surplus, i.e. excluding interest, public debt still represented 64% of GDP at the end of 2018, with external debt accounting for 62% of the total and 70% of debt denominated in foreign currency, i.e. 39% and 42% of GDP respectively. Debt should continue to be reduced at a measured pace, despite the insistence of international financial institutions that fiscal consolidation be a condition of their assistance. In the context of the conflict in the eastern regions (Donetsk and Lugansk), which are controlled by Russian-backed separatists, military spending will remain high (8% of GDP). In addition, the privatisations planned for 2019 are likely to attract few foreign investors, although some good deals may be possible despite the entry into force of a new law in June 2018 aimed at greater transparency. Moreover, if the private share is added in, the external debt to GDP ratio climbs to 88%. In 2019, debt payments could amount to USD 15 billion (11% of GDP). A spell of weakness for the hryvnia would add to the bill. The current account deficit will persist, as employee compensations and expatriate remittances, combined with revenues from road and gas transit (8.8% of GDP in total), are not enough to offset debt interest (6%) and the trade deficit (9.6%).
Meanwhile, foreign exchange reserves cover only 5 months of imports or 40% of short-term external debt. Inward FDI accounts for about 2% of GDP. The contribution of international financial institutions will therefore be crucial. The 2015 agreement with the IMF provided for an ECF of USD 17.5 billion in return for reforms. By October 2018, five months before the closing date, just USD 9 billion had been released, with the last payment going back to April 2017. The impending elections in 2019 and the (costly) use of the market made possible by the improved internal and external situation have prompted the authorities to postpone or water down the reforms that are required for the release of funds. A Stand-by Arrangement with the IMF of USD 3.9 billion over 14 months, in addition to contributions from the EU and the World Bank, replaced these funds once the 2019 budget, which includes savings equivalent to 2.5 percentage points of GDP, was adopted. While adoption of the budget and the recent increase in the price of domestic gas to bring it closer to the market price allowed a first payment of USD 1.4 billion, following payments will depend on perseverance in the reforms.

 

Uncertainty about reforms and conflict in the east of the country

In April 2019, Volodymyr Zelenskyi, a 41 year-old comedian and TV producer, won the presidential election with over 73% of the second round vote against incumbent Petro Poroshenko. Mr Zelenskyi entered politics just four months prior with the declaration of his candidacy. He was previously best known for his self-written role in the famous TV series Servant of the People where, as a history professor, he is propelled to the presidency to clean his country of corruption. His status as a newcomer in politics and an artist represents the people’s rejection of politicians and their low confidence in institutions. Corruption persists and oligarchs maintain their control over politics, the media and the administration. Furthermore, conflict in Donbass, where skirmishes and casualties have not ceased, could erupt again. De facto control of the Sea of Azov by Russia has severe repercussions for bordering Ukrainian ports. The conflict is likely to complicate the issue of gas transit from Russia to the EU through Ukraine. The 10-year old agreement between Gazprom and Naftogaz, which generates fees fluctuating between 2.5 and 3% of Ukraine’s GDP, will expire on December 31, 2019. However, the absolute majority of seats obtained by the presidential party "Servant of the People" in the legislative elections of July 2019 could facilitate the reforms.

 

 

Last update: August 2019

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