Ukraine Business Forecast Report Q1 2015

Ukraine Business Forecast Report Q1 2015

Core Views

Ukraine’s economy is headed for a major recession which it is unlikely to emerge from until 2016. Ongoing fighting between the Ukrainian army and pro-Russia forces in the east, and the persistent threat of a military invasion by Russia, raises huge challenges to our ability to forecast the economic outlook over the coming quarters to any
meaningful degree of confidence.
EU/IMF financing package will require reforms, including: FX liberalisation (although this is likely to be implemented in stages), partial removal of gas subsidies and potentially pension reform. Despite the new IMF package, Ukraine’s fiscal position remains poor and is likely to deteriorate over the coming quarters. FX shocks, extended fighting and the growing risk of a banking sector bailout all pose significant challenges to the sovereign debt profile. Ultimately, we believe that Ukraine’s debt load is likely to become unsustainable, necessitating a debt restructuring further down the line. Putin will be happy with Crimea for now, and will not push military intervention into North East of Ukraine. Ethnic divisions in NE Ukraine not nearly as clear cut as Crimea, and it would benefit Putin to retain a large ethnic Russian influence in mainland Ukraine (enabling him to maintain a direct political stake in Ukrainian affairs).

Major Forecast Changes

We have revised up our 2014 real GDP estimate slightly, although we emphasise this is because we have adjusted our GDP forecasts to exclude Crimea in order to keep our statistics consistent with the national statistical agency’s decision. The deeper than expected devaluation will also reduce imports more than we initially forecast, reducing the drag from weaker exports. We estimate real GDP will contract by 5.3% in 2014, and forecast a further contraction of 5.2% in 2015.
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 Index 7
Domestic Politics 8
Conflict To Escalate; No Early Lifting Of Russia Sanctions 8
The fighting in Eastern Ukraine will escalate in the near term, with a high risk of new fronts opening up, but the endgame remains
a stalemated conflict. Given current security dynamics, there will be no lifting of Western sanctions on Russia until well into 2015 at
best.
table: Politic al Over view 8
Foreign Policy 9
High Risks, If US Arms Kiev's Forces 9
Any US provision of lethal equipment to Ukraine would risk escalating the conflict substantially. As such, Washington will adopt a 'wait
and see' approach in the near term, and calibrate its policy according to Russia's next steps.
Long-Term Political Outlook 11
Eastern Separatism To Persist, While Myriad Other Risks Loom 11
Ukraine will emerge weaker from the 2014 conflict, losing de facto control of the separatist East to pro-Moscow forces. Even without
the conflict, President Petro Poroshenko faces colossal challenges in averting economic crisis, tackling corruption, and reforming the
economy.
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Index 15
Economic Activity I 16
Recession Until 2016 16
Ukraine's economy will remain in a deep recession throughout 2015 as the conflict in the east rages on. Soaring inflation, a crippled
banking sector and severely weakened currency will keep the economy close to the brink of collapse over the coming quarters.
table: GDP By Expenditure 16
Economic Activity II 18
Ukraine's Energy Predicament To Increase Russia's Sway 18
While the gas dispute between Ukraine and Russia has been a major issue in the Ukraine crisis, we draw attention to other aspects of
Ukraine's energy predicament, such as coal and electricity shortages, which, in our view, will increase Russia's economic leverage over
Kiev.
Fiscal Policy 19
Credit Event Drawing Closer 19
Ukraine is likely to experience a credit event in the coming quarters unless further capital injections are provided. Even with additional
funding, the devaluation of the hryvnia has severely undermined the sustainability of the debt load.
table: Fiscal Policy 19
Exchange Rate Policy 21
UAH: On The Brink Of Collapse 21
The hryvnia will remain under intense pressure for the foreseeable future, and the authorities' ability to defend the exchange rate is
highly limited. Until a lasting ceasefire can be reached in eastern Ukraine, the hryvnia will remain vulnerable to deeper downside shocks
for the foreseeable future.
table: Currency Forecast 21
Business Monitor International Ltd www.businessmonitor.com 3
Contents
Chapter 3: 10-Year Forecast 23
The Ukrainian Economy To 2023 23
Colossal Structural Reform Needed To See Through The Decade 23
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 ten 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 Macr oec onomic Forec asts 23
Chapter 4: Operational Risk 27
Operational Risk 28
table: Operational Risk 28
Transport Network 29
table: Emergi ng Eur ope - Transp ort Netw ork Ris ks 30
Economic Openness 34
table: Emergi ng Eur ope - Economic Ope nnes 35
table: Top 5 Trade Part ners - Product Imp orts (USDmn unles otherwise st ated ) 36
table: Top 5 Products Exported (USDmn unles otherwise st ated ) 37
Chapter 5: Key Sectors 39
Infrastructure 39
table: Construction And Infrastructure Industry Data 40
Table: Construction And Infrastructure Industry Data 41
Oil & Gas 42
table: Oil Production 43
table: Oil Production 43
table: Gas Production 44
table: Gas Production 44
Other Key Sectors 47
Table: Pharm a Sect or Ke y Indic ators 47
Table: Telec oms Sect or Ke y Indic ators 47
Table: Defence and Security Sector Key Indicators 47
Table: Food and Drink Sector Key Indicators 48
Table: Autos Sector Key Indicators 48
Table: Freight Key Indicators 48
Chapter 6: BMI Global Assumptions 49
Global Outlook 49
Warning Signs Growing 49
Table: Global Asumpti ons 49
Table: Developed States , Real GDP Growt H, % 50
Table: BMI VERSUS BLO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, % 50
Table: Emergi ng Markets , Real GDP Growth , % 51
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