Country Report Ukraine December 2008

Outlook for 2009-10

• The domestic political scene will remain uncertain and prone to instability in the run-up to the presidential election that is due in early 2010. An early parliamentary election is probable in 2009.
• Ukraine is unlikely to make significant progress toward membership of NATO over the forecast period. Nevertheless, should it do so, there would be a serious risk of a destabilising escalation in tensions with Russia.
• In order to restore financial and economic stability, the authorities will target a tightening of fiscal and monetary policies in 2009-10, and implement a flexible exchange rate.
• We assume that enough will be done to prompt the release of further tranches of IMF support in 2009-10. However, the risks to this outlook are considerable, given the lack of political consensus.
• The economy is now expected to contract in 2009 and recover only slowly in 2010, following the spread of the global financial market turmoil to Ukraine in October 2008.
• The currency will weaken sharply in 2009, and the current-account deficit is now forecast to narrow on the basis of lower import demand.

Monthly review

• In October parliament approved a package of measures to tackle the financial and economic crisis and to pave the way for an IMF deal. However, it failed to approve the release of funding for an early election in December.
• Parliament has dismissed its speaker, Arseny Yatsenyuk, in effect halting the legislature's work and further deepening the political stalemate in the country.
• Russia has demanded that Ukraine pay what it says is US$2.4bn in debt for gas supplies, and has raised questions over the supply of gas in 2009.
• The IMF has approved a US$16.4bn package of support to Ukraine, and released a first tranche of support, amounting to US$4.5bn.
• Industrial output slumped by a shocking 20% year on year in October, and GDP contracted by 2.1%. All sectors of the economy are now being affected by the financial crisis.
• Consumer price inflation continued its gradual decline in October, reaching 23.2% year on year, from 31% in May. Disinflation was driven by easing food prices, but utility price inflation is rising.
• Despite massive interventions by the National Bank of Ukraine (NBU, the central bank), the hryvnya had by late November lost over 30% of its value against the US dollar since end-August.

Source: Country Report