Country Forecast Ukraine January 2012 Updater
Market Research Report

Country Forecast Ukraine January 2012 Updater Market Research Report

Overview

The president, Viktor Yanukovych, is on balance expected to retain a grip on power, although his popularity has fallen. The erosion of the democratic gains of the "Orange Revolution" will continue. The lending agreement with the IMF will guide economic policy in 2012-13, but compliance will be patchy. The government will target a narrowing of the budget deficit, and limited further progress on pro-market reforms is likely. The economy grew by 4.2% in 2010. The Economist Intelligence Unit estimates growth of 4.9% in 2011, supported by a strong harvest. We forecast growth of 2.5% in 2012 as the external environment deteriorates, and an average of 4.2% annually in 2013-16. Inflationary pressure is forecast to ease further in 2012, owing to lower food and commodity prices. The current-account deficit is expected to remain broadly contained, but Ukraine remains vulnerable to a shortage of external financing pursuant, for example, to a banking crisis in the euro area.

Key changes from last month

Political outlook

On December 19th the EU refused to sign an Association Agreement with Ukraine. The technical requirements had been met, but the EU is not prepared to condone the severe democratic backsliding in Ukraine. There is no sign that Yuliya Tymoshenko, the main opposition leader and previous prime minister, will be released from jail, and the EU is unlikely to sign the agreement until after the Ukrainian election in October 2012 at the earliest.

Economic policy outlook

The Ministry of Finance reached an agreement with VTB, a Russian bank, to extend for another six months the loan of US$2bn that VTB granted Ukraine in June 2010.

Economic forecast

After slowing in September and October, industrial output growth weakened again in November, to 3.8% year on year-the slowest rate of expansion in 2011. This reflects slackening export demand. We forecast that the deteriorating external environment will lead to a sharp weakening of real GDP growth in 2012, to 2.5% from an estimated 4.9% in 2011.

Please Note: Due to the Nature of This Report The Toc is Not Available