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Ukraine Business Forecast Report Q1 2013

  • Publication Date:January 2013
  • Publisher:Business Monitor
  • Product Type: Report
  • Pages:53
  • ISBN:170743

Ukraine Business Forecast Report Q1 2013

Core Views:
In line with our view for a sharp slowdown in growth, Ukraine contracted
in by 1.3% in Q311. We expect real GDP to contract by just
-0.1% and expand by 1.0% in 2012 and 2013 respectively.
We maintain our expectations for growing external account imbalances
to drive a devaluation of the hryvnia.
We see political risks as likely to grow over the next 12 months.
The imprisonment of former prime minister Yulia Tymoshenko has
severely soured relations with the EU, while bilateral relations with
Russia remain tense over the issue of Ukraine's gas imports.

Major Forecast Changes:
Recent economic indicator readings suggest a more aggressive
economic slowdown earlier than we anticipated. We have long-held
a negative outlook for Ukrainian economic activity, on our negative
outlook for global metallurgical markets, a hryvnia devaluation and
a weaker external demand. As a result, we have downgraded our
real GDP growth forecasts to -0.1% and 1.0% in 2012 and 2013
respectively, from previous forecasts of 2.0% and 0.9%.
We retain our negative outlook on Ukraine's fiscal deficit, which we
now expect to arrive at 4.9% of GDP in 2012 and 4.6% of GDP in
2013. Expensive debt servicing costs, expansionary social spending
policies coupled with over-optimistic official growth forecasts
underpin our cautious stance towards Ukraine's fiscal outlook.

Key Risks To Outlook:
A sharper than expected devaluation could trigger major shockwaves
through the domestic economy, particularly within the financial sector,
which has barely recovered from the 2008 devaluation. Existing
capital buffers may prove insufficient to deal with a devaluation of
20% magnitude or greater.
The main upside risks to our forecast arrive from China's US$158bn
infrastructure programme, announced at the start of September.
While Chinese markets are barely linked to Ukraine's steel sector,
the announcement could help to boost slumping steel prices in
increasingly globalised markets, in turn providing some support to
Ukraine's exports.
Executive Summary ... 5
Core Views: ..5
Major Forecast Changes: 5
Key Risks To Outlook: 5
Chapter 1: Political Outlook .. 7
SWOT Analysis .. 7
BMI Political Risk Ratings 7
Domestic Politics .. 8
Difficult Decisions Lie Ahead Post-Election ..8
The ruling Party of Regions has held onto its majority following the parliamentary elections on October 28, providing President Viktor
Yanukovych with a pro-presidential majority. With the Party of Regions' majority now secured and the next election three years away,
the government will turn its long-overdue focus to economic policy and reform. Energy policy and currency stability will present majornear
term obstacles to economic growth and the government will have to undertake difficult decisions to avoid a full-blown crisis.
TABLE: POLITICAL OVERVIEW 9
Long-Term Politics 10
At A Political Crossroads ...10
Ukraine's long-term political trajectory is far from certain, with the coming years likely to prove crucial to the country's convergence
prospects through 2020. Weak institutions remain the greatest challenge to long-term stability, though we also highlight systemic
tensions in bilateral relations with Russia and growing demographic issues as additional threats likely to confront future governments.
The worst case scenario for Ukraine would entail a continuation of the status quo.
Chapter 2: Economic Outlook .. 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Monetary Policy .... 16
No Quick Fix To Exchange Rate Pressures .16
The 8.4% collapse in Ukraine's international reserves reinforces our long-held view that the country's deteriorating balance of payments
dynamics will drive a devaluation of the hryvnia. While the government has since moved aggressively to slow the pace of erosion,
authorising the National Bank of Ukraine to force exporters and certain individuals to sell foreign currencies, we believe that the
fundamental drivers behind the deteriorating balance of payments will remain in place, and as such, a devaluation will remain almost
inevitable.
TABLE: MONETARY POLICY .16
Economic Activity 18
Sliding Into Recession In H212 18
Recent economic indicator readings suggest a more aggressive economic slowdown earlier than we anticipated. We have long held
a negative outlook for Ukrainian economic activity, on our negative outlook for global metallurgical markets, a hryvnia devaluation and
a weaker external demand. As a result, we have downgraded our real GDP growth forecasts to -0.1% and 1.0% in 2012 and 2013
respectively, from a previous forecast of 2.0% and 0.9%.
TABLE: ECONOMIC ACTIVITY 18
Fiscal Policy 19
Negative Stance On Fiscal Outlook ....19
We retain our negative outlook on Ukraine's fiscal deficit, which we expect to arrive at 4.9% of GDP in 2012 and 4.6% of GDP in 2013.
Expensive debt servicing costs and expansionary social spending policies coupled with over-optimistic official growth forecasts underpin
our cautious stance towards Ukraine's fiscal outlook.
TABLE: FISCAL POLICY 19
Balance Of Payment ... 21
External Accounts Will Remain Under Pressure ....21
We anticipate Ukraine's external position will remain under pressure in 2013, although our expectations for a devaluation of the
hryvnia due to pressures on the current account should help to drive a slight narrowing of the deficit. Exports will remain depressed,
due to weak external demand, while financing of the deficit will remain unpredictable, likely resulting in further erosion of international
reserves.
TABLE: CURRENT ACCOUNT .21
Banking .. 23
Assessing Devaluation Shocks On Domestic Banks ..23
We retain our negative assessment of Ukraine's banking sector, based on our expectations for hryvnia devaluation and slowing
economic growth. High levels of FX exposure in the banking system will require significant increases in loan-loss provisioning in the
event of devaluation, and current capital buffers remain at risky levels, particularly given that expected profitability will be hard to come
by in the coming quarters.
TABLE: EXCHANGE RATE .23
TABLE: ACCOUNTING NET FX POSITION ..24
TABLE: DYNAMICS OF REGULATORY CAPITAL RATIOS UNDER DEVALUATION SCENARIOS .. 25
TABLE: FX LOANS & FX LOANS-TO-TOTAL LOANS RATIO ....26
Chapter 3: 10-Year Forecast 29
The Ukrainian Economy To 2021 ... 29
Colossal Structural Reform Needed To See Through The Decade . 29
Having failed thus far to break free from its dependence on cheap energy and a low-value-added export base, Ukraine has arguably
squandered the economic windfall experienced over the last 10 years. While there is still enormous unrealised potential in terms of
political reform and economic catch-up, without institutional and economic reform, Ukraine's current economic growth model will prove
unsustainable over the coming decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS ....29
Chapter 4: Business Environment 33
SWOT Analysis 33
BMI Business Environment Risk Ratings 33
Business Environment .. 34
Institutions . 34
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 34
TABLE: BMI LEGAL FRAMEWORK RATING ....35
Infrastructure .. 36
TABLE: LABOUR FORCE QUALITY ...36
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS ...37
TABLE: TRADE AND INVESTMENT RATINGS .38
Market Orientation 39
Operational Risk .. 40
Chapter 5: Key Sectors .. 41
Oil & Gas 41
TABLE: OIL & GAS - HISTORICAL DATA AND FORECASTS, 2009-2016 ....44
Infrastructure .. 45
TABLE: CONSTRUCTION AND INFRASTRUCTURE INDUSTRY DATA, 2008 -2016 48
Other Key Sectors 49
TABLE: AUTOS SECTOR KEY INDICATORS ..49
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS ...49
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS ..49
TABLE: PHARMA SECTOR KEY INDICATORS 50
TABLE: TELECOMS SECTOR KEY INDICATORS ..50
TABLE: FREIGHT KEY INDICATORS .50
Chapter 6: BMI Global Assumptions .. 51
Global Outlook . 51
Downward Revisions, But Core Views Remain Unchanged .51
TABLE: GLOBAL ASSUMPTIONS 51
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST .52
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS .52
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 53
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