Ukraine Business Forecast Report Q3 2009

Publication Date	June 2009
Publisher	Business Monitor
Product Type	Report
Pages	65
ISBN Number	1745-0756
Product Code	BMI03950

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Summary

BMI's Q309 Ukraine Business Forecast Report paints a decidedly bleak outlook on the health of the Ukrainian economy this year. With external demand for key exports remaining subdued, and the private sector being forced to undergo a painful process of deleveraging, economic activity is set to collapse in 2009. We forecast real GDP to contract by an astounding 14.7% this year, which will make Ukraine's economy the worst performing in the world. To be sure, the fractious and highly unstable political environment in Kiev continues to undermine economic stability and heighten international investor risk aversion towards the country. Though the IMF's decision in early May to release the second tranche of emergency financing under its US$16.4bn Stand-By Arrangement will help avert the most dire of economic crisis scenarios unfolding in the near term, we caution that Ukraine is by no means out of the woods.

The ruling by Ukraine's Constitutional Court on May 13 that parliament's previous decision to hold presidential elections in October 2009 was unconstitutional will further undermine the government's ability to develop coherent and timely legislation aimed at addressing the impact of the economic crisis. We are particularly concerned that the potential for a spike in confrontations between the executive and legislative branches will slow the passage of necessary economic reforms required by the IMF in order to proceed with its package of emergency financing. That said, over the medium term, presidential elections will likely lead to an improvement in bilateral relations with Russia, particularly as the avowedly 'pro-Western' President Viktor Yushchenko is highly likely to exit government, which should bode well for underlying stability.

Despite the hryvnia's recent stabilisation, we caution that fundamental pressures on the unit will remain firmly to the downside in 2009, and as a result, we expect the currency to sell off further before the end of the year. It is particularly concerning that even as restrictions on the purchases of foreign currency remain firmly in place, and state energy firm Naftogaz (which remains one of the largest buyers of foreign currency in the country) continues to claw back its purchases of natural gas, the central bank has nevertheless been forced to maintain its near daily interventions in the foreign exchange market. As a result, we believe confidence in the unit remains in short supply, which will put significant downside pressures on the currency through the end of the year.

We maintain our forecast for the unit to depreciate to UAH10.0000/US$ by end-2009.

The World Bank and Ukraine have started work on a project which aims to make supply of power more efficient and reliable in the former Soviet state, according to local media. The project includes renovation of power substations and power-transmission lines through to the year 2013. It is expected that around US$238mn will be used to execute the project, of which around US$200mn will be World Bank loans guaranteed by the government. The remaining will be provided by the Ukrenerho national power company. This project comes under the country's programme to improve and develop the power generating industry. The modernisation of Ukraine's power-transmission line should help to provide reliable power supply through rehabilitation of transmission substations and strengthening of the power transmission network.

Content

Executive Summary
- Full-Scale Crisis Averted. For Now
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Constitutional Court Ruling Raises S-T Uncertainty
- The ruling by Ukraine's Constitutional Court on May 13 that parliament's previous decision to hold presidential elections in October was unconstitutional will further undermine the government's ability to develop coherent and timely legislation aimed at addressing the impact of the economic crisis
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Full-Blown Crisis Averted. For Now
- The IMF's decision to release the second tranche in emergency financing to Ukraine (under the country's US$16.4bn
- Stand-By Arrangement) will help ward off the most dire of crisis scenarios unfolding in the short term
- Balance Of Payments
- Massive Current Account Correction Underway
- The external asymmetries built into Ukraine's economy over the past several years are in for a rapid correction in 2009
- Exchange Rate
- Further Depreciation Likely
- Having lost over 60% of its value since the fourth quarter of 2008 and testing record lows near UAH9.2000/US$ in late February, the Ukrainian hryvnia has since stabilised markedly
- Monetary Policy
- Disinflationary Momentum To Slow
- We project Ukrainian inflation coming in at 17.0% y-o-y at end year, down from 22.3% at end-2008
- External Debt
- Gross External Debt Burden To Deflate Precipitously
- We expect to see a marked decline in Ukraine's stock of gross external debt in 2009, as the private sector in particular is forced to account for its years of excessive borrowing
Chapter 3: 10-Year Forecast
- The Ukrainian Economy To 2018
- Convergence Delayed, But Still In Play
- Ukraine's economy is set to enter a period of relatively stagnant growth on the heels of the 2008-2010 global financial crisis, with the private sector likely to encounter significant difficulty tapping international financial capital markets, which we believe will anchor trend growth on a much lower trajectory over the long term
Chapter 4: Special Report
- The Outlook For Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Petrochemicals
- Executive Summary
- The slump in the petrochemicals industry seen in H208 is likely to worsen further in 2009, with BMI's earlier forecast of a 50% drop in output already seen in January 2009
- Metals
- Executive Summary
- BMI's Ukraine Metals Report forecasts a 55% drop in steel output as the construction and automotive industries, the chief victims of the credit crunch, grind to a halt both in Ukraine and in key export markets such as Russia
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Ukraine Political Overview
- Table: ECONOMIC ACTIVITY
- Table: BALANCE OF PAYMENTS
- Table: EXCHANGE RATE POLICY
- Table: MONETARY POLICY
- Table: FOREIGN DEBT
- Table: LONG-TERM MACROECONOMIC FORECASTS
- Table: LOAN-TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS, SELECTED STATES
- Table: BMI BUSINESS & OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: EUROPE, FDI ANNUAL INFLOWS
- Table: BMI TRADE RATINGS
- Table: TOP EXPORT DESTINATIONS
- Table: Ukraine Petrochemical Indust ry - Histo rical Data & Forecasts
- Table: Ukraine's Metals Indust ry, 2006-2013
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL & REGIONAL REAL GDP GROWTH
- Table: EMERGING MARKETS
- Table: COMMODITIES