Ukraine Business Forecast Report Q2 2009

Teetering On The Edge Of Depression

In the latest edition of the Ukraine Business Forecast Report Q209, we highlight the relatively dire outlook for the country's growth prospects in 2009. Although we have pencilled in a contraction in real GDP growth of 7.2%, we caution that risks remain weighted heavily to the downside. We have highlighted the five scenarios which we believe pose the biggest risk to stability in 2009, and caution that the emergence of one will have a significant knock-on effect throughout the wider economy, potentially dragging growth below -10%. Although we expect Ukraine's economy to recover in 2010, with growth of 2.4% currently projected, we caution that previous rates of robust economic expansion are not likely to be repeated in the foreseeable future. Indeed, the days of cheap, readily available credit, which helped fuel an average rate of real GDP growth of 7.4% between 2000 and 2007, are now likely to have passed. As such, we forecast real GDP to expand by an average 4.7% between 2011 and 2013.

We believe 2009 will test the limits of Ukrainian governmental stability. Although we generally hold a relatively pessimistic outlook on policy formation in Ukraine, the combination of a severe economic downturn and upcoming presidential elections are set to exacerbate pre-existing tensions in parliament. As leading politicians begin campaigning for the January 2010 vote, we caution that the government's ability to effectively tackle the effects of the ongoing economic crisis will remain impaired through the medium term, which will increase the risks of the impending recession being more severe than currently expected. Moreover, as public discontent increasingly turns against the government, we also expect to see further ruptures within the recently restored 'Orange' alliance, thereby elevating the risks to the ruling coalition's medium-term stability.

Although the hryvnia stabilized in January, we maintain our core view that fundamental pressures on the unit will remain firmly to the downside. Given the combination of an expected slowdown in capital inflows, a bleak macroeconomic outlook, and ongoing political instability, we see little reason to like the currency through the medium term, and project further depreciation towards UAH10.0000/US$ by end-2009. While this would typically benefit current account dynamics by increasing the price competitiveness of Ukrainian exports, we caution that the ongoing demand destruction taking place throughout emerging Europe will likely mitigate the immediate impact of a weaker currency.

An agreement reached on January 18 between Ukrainian Prime Minister Yulia Tymoshenko and her Russian counterpart Vladimir Putin brought the latest Russia-Ukraine gas crisis to a conclusion.

According to the terms of the deal, Ukraine will pay European gas prices, less 20%, in 2009, with a full transition to European market prices in 2010, while Russia will pay the same transit fee for shipping gas to European markets in 2009, with a transition to full market prices the year after.

In addition, it was agreed that intermediary gas trader RosUkrEnergo (RUE) is to be phased out of the Russian-Ukrainian gas trade. Although we do not believe the temporary disruption in gas supplies in January will have a pronounced impact on full-year real GDP growth, we nevertheless caution that industrial production figures for January (when many firms were forced to suspend or cutback production) will likely be subdued.