Country Forecast Ukraine October 2011 Updater
Market Research Report

Country Forecast Ukraine October 2011 Updater Market Research Report

Overview

The president, Viktor Yanukovych, is expected to retain a firm grip on power. The erosion of the democratic gains of the "Orange Revolution" will continue. Relations with Russia will remain tense. The lending agreement with the IMF will guide economic policy in 2011-13, but there is a high risk that 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 to remain at 4.2% in 2011, supported by higher steel prices. We forecast growth of 3.8% in 2012 as the external environment deteriorates, and an average of 4.4% annually in 2013-16. Inflationary pressure is forecast to ease in the second half of 2011 and further in 2012, owing to lower food and commodity prices. The current-account deficit is expected to remain broadly contained.

Key changes from last month

Political outlook

The case against Yuliya Tymoshenko, the former prime minister who is on trial for abuse of power when she signed a gas deal with Russia in 2009, resumed on September 27th after an unexpected two-week adjournment. The adjournment seems to have been a response to growing pressure from the EU and the US to end the trial and to free Ms Tymoshenko.

Economic policy outlook

The draft 2012 budget targets a deficit equivalent to 2.5% of GDP, down from a planned deficit of 3.5% in 2011, including deficits on the pension fund and Naftogaz, the state energy holding. However, the draft budget is based on growth of 5.5% in 2012, which is more optimistic than our forecast of 3.8%.

Economic forecast

In August strong harvests continued to boost agricultural output, which should help to buttress growth in the third quarter amid a worsening external environment. Industrial production also fared well in August, expanding by 9.6% year on year. As a result, we have maintained our estimate of 4.2% growth in 2011, but have lowered our growth forecast for 2012 to 3.8%.

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