Ukraine Business Forecast Report Q2
2013

Ukraine Business Forecast Report Q2 2013

Core Views In line with our view for Ukraine to enter a recession, real GDP contracted by 2.7% y-o-y in Q412, the second consecutive quarter of economic contraction. We expect real GDP to contract by 1.4% in 2013.

We maintain our expectations for growing external account imbalances to drive a devaluation of the hryvnia by end-2013.

We see political risks as likely to growth 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: We have downgraded our outlook for real GDP growth for 2013 and 2014, and now expect GDP to contract by 1.4% in 2013 and grow by just 1.0% in 2014. This change reflects our bearish outlook for global metallurgical markets next year, our expectations for hryvnia devaluation, and expectations of a retrenchment in government spending.

We have adjusted our expectations for Ukraine's fiscal deficit in 2013 and 2014, to 3.5% of GDP and 2.2% respectively. Weak revenues and imprudent social spending will drag the deficit higher this year and borrowing costs will remain high.

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
  • Core Views
  • Major Forecast Changes:
  • Key Risks To Outlook:
• Chapter 1:Political Outlook
  • SWOT Analysis
  • BMI Political Risk Ratings
  • Domestic Politics
  • Drifting Away From The EU
  • Recent statements from the EU suggest that it is growing increasingly concerned about the deterioration in Ukraine's political situation
  • and Brussels may be preparing to abandon the Association Agreement. We expect that Ukraine will continue to languish in political
  • isolation over
    • TABLE: POLITICAL OVERVIEW
  • Long-Term Political Outlook
  • At A Political Crossroads
  • 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
  • Going forward, the worst case scenario for Ukraine would entail a continuation of the status quo
• Chapter 2: Economic Outlook
  • SWOT Analysis
  • BMI Economic Risk Ratings
  • Economic Activity
  • Hard To Find Growth Drivers In 2013
  • Persistent weakness in global steel demand, an overvalued currency and a weak investment climate will continue to weigh on
  • Ukraine's growth prospects, and we forecast the economy to contract by 1.4% in 2013. While we anticipate a modest recovery in 2014,
  • forecasting 1.0% real GDP growth, Ukraine will have to make substantial adjustments to its economy in order to achieve a sustainable,
  • long-term growth trajectory
    • TABLE: ECONOMIC ACTIVITY
  • Balance Of Payments
  • Trade Balance Dangerously Close To 2008 Levels
  • Ukraine's current account deficit will stay wide as weak global demand for steel and expensive gas imports continue to drive the
  • merchandise trade balance deeper into the red. With a robust recovery in global metallurgical markets unlikely over the course of this
  • year, dwindling reserves will increase the odds of an uncontrolled devaluation unless Ukraine can arrive at an agreement for lower gas
  • prices with Russia
    • TABLE: CURRENT ACCOUNT
  • Fiscal Policy
  • Major Fiscal Challenges Ahead
  • As we expected, Ukraine's fiscal deficit fell significantly wide of the 2012 budget, due to excessively optimistic growth forecasts, weak
  • tax revenues and elevated social spending ahead of last year's parliamentary election. The state budget arrived at 3.8% of GDP of
  • 2012, below our forecast of 4.9%. However, no data for the year-end deficits of the Pension Fund and Naftogaz have been released yet,
  • which are likely to increase total government expenditure by around 1.5% of GDP
    • TABLE: FISCAL POLICY
  • UAH: Managed Or Uncontrolled Devaluation In 2013
  • Banking Sector
  • Outlook For Banks Getting Worse
• Chapter 3: 10-Year Forecast
  • The Ukrainian Economy To 2022
  • Colossal Structural Reform Needed To See Through The Decade
  • 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
• Chapter 4: Business Environment
  • SWOT Analysis
  • BMI Business Environment Risk Ratings
  • Business Environment Outlook
  • Institutions
    • TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
    • TABLE: BMI LEGAL FRAMEWORK RATING
  • Infrastructure
    • TABLE: LABOUR FORCE QUALITY
    • TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS
    • TABLE: TRADE AND INVESTMENT RATINGS
  • Market Orientation
  • Operational Risk
• Chapter 5: Key Sectors
  • Autos
    • TABLE: UKRAINE VEHICLE PRODUCTION, 2011-2017
    • TABLE: UKRAINE VEHICLE SALES, 2011-2016
  • Food & Drink
    • TABLE: FOOD CONSUMPTION INDICATORS - HISTORICAL DATA & FORECASTS, 2010-2017
    • TABLE: ALCOHOLIC DRINKS VALUE/VOLUME SALES - HISTORICAL DATA & FORECASTS, 2010-2017
    • TABLE: MASS GROCERY RETAIL SALES BY FORMAT - HISTORICAL DATA & FORECASTS
  • Other Key Sectors
    • TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
    • TABLE: PHARMACEUTICALS SECTOR KEY INDICATORS
    • TABLE: TELECOMS SECTOR KEY INDICATORS
    • TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS
    • TABLE: FREIGHT KEY INDICATORS
• Chapter 6: BMI Global Assumptions
  • Global Outlook
  • Past The Major Obstacles To Recovery
    • TABLE: GLOBAL ASSUMPTIONS
    • TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
    • TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%)
    • TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS