Country Report Ukraine August 2008

Outlook for 2008-09

• The governing coalition of the two "Orange" parties—the Yuliya Tymoshenko Bloc (YTB) of the prime minister, and the pro-presidential Our Ukraine-People's Self-Defence (OU-PSD)—is not expected to survive for long.
• A lack of political consensus in the run-up to the presidential election in 2010 is likely to preclude swift structural reform.
• High inflation and a widening current-account deficit will present the main risks to macroeconomic stability in 2008-09.
• GDP growth is forecast to slow to an annual average of 6% in 2008-09, reflecting the slowing of global expansion and an easing of domestic demand growth, amid high inflation and a tightening of monetary policy.
• The current-account deficit is forecast to widen to an annual average of 6.7% of GDP in 2008-09, owing to rising import costs and strong import volume growth.

Monthly review

• The government has survived a no-confidence vote initiated by the opposition Party of Regions (PoR).
• Viktor Yanukovych, the PoR leader and the previous prime minister, has regained his position as Ukraine's most popular politician. Ms Tymoshenko is losing her appeal because of the worsening economic situation.
• Russia has welcomed the appointment of Kostyantyn Hryshchenko—who is linked to the more pro-Russian PoR—as Ukraine's new ambassador. However, relations with Russia remain strained by a number of issues, including Ukraine's prospects for NATO membership and the fate of Black Sea Fleet.
• The authorities have resumed talks with Russia over the price of gas imports in 2009, amid threats that it could more than double.
• Parliament has rejected the government's proposed amendments to the 2008 budget, which envisaged spending most of planned increase in revenue.
• Real GDP growth picked up to 7.2% year on year in May, supported by household consumption. However, there are signs that income and credit growth, which have been fuelling consumption, are beginning to ease.
• Year-on-year consumer price inflation moderated in June for the first time since early 2007 because of slower food price growth, but remained extremely high, at over 29%.
• Strong domestic demand and higher import costs were behind a tripling in the current-account deficit year on year in the first quarter of 2008. The deficit was only just covered by inflows on the financial account.