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Ukraine Business Forecast Report Q2 2013

  • Publication Date:April 2013
  • Publisher:Business Monitor
  • Product Type: Report
  • Pages:49
  • ISBN:187811

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 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
Drifting Away From The EU 8
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 2013
TABLE: POLITICAL OVERVIEW 8
Long-Term Political Outlook 9
At A Political Crossroads 9
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 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Hard To Find Growth Drivers In 2013 14
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 14
Balance Of Payments 16
Trade Balance Dangerously Close To 2008 Levels 16
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 16
Fiscal Policy 18
Major Fiscal Challenges Ahead 18
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 18
UAH: Managed Or Uncontrolled Devaluation In 2013? 20
Banking Sector 21
Outlook For Banks Getting Worse 21
Chapter 3: 10-Year Forecast 25
The Ukrainian Economy To 2022 25
Colossal Structural Reform Needed To See Through The Decade 25
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 25
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 30
TABLE: BMI LEGAL FRAMEWORK RATING 31
Infrastructure 32
TABLE: LABOUR FORCE QUALITY 32
TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS 33
TABLE: TRADE AND INVESTMENT RATINGS 34
Market Orientation 35
Operational Risk 36
Chapter 5: Key Sectors 37
Autos 37
TABLE: UKRAINE VEHICLE PRODUCTION, 2011-2017 38
TABLE: UKRAINE VEHICLE SALES, 2011-2016 38
Food & Drink 39
TABLE: FOOD CONSUMPTION INDICATORS - HISTORICAL DATA & FORECASTS, 2010-2017 40
TABLE: ALCOHOLIC DRINKS VALUE/VOLUME SALES - HISTORICAL DATA & FORECASTS, 2010-2017 42
TABLE: MASS GROCERY RETAIL SALES BY FORMAT - HISTORICAL DATA & FORECASTS 43
Other Key Sectors 45
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 45
TABLE: PHARMACEUTICALS SECTOR KEY INDICATORS 45
TABLE: TELECOMS SECTOR KEY INDICATORS 45
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 46
TABLE: FREIGHT KEY INDICATORS 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Past The Major Obstacles To Recovery 47
TABLE: GLOBAL ASSUMPTIONS 47
TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS 48
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS (%) 48
TABLE: EMERGING MARKETS, REAL GDP GROWTH FORECASTS 49
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