The Ukrainian economy grew slower in March 2012 as, in addition to a challenging external environment, some of the domestic factors lost their intensity that month. A 2.5% yoy decrease in exports of goods in March, led by weak exports of metallurgical and mineral products as well as a sharp slowdown in overseas shipment of machinery and transport vehicles, weighed on economic activity in the respective industries, cargo transportation and wholesale trade. Thus, industrial output fell by 1.1% yoy in March, while cargo turnover was down by almost 8% yoy in 1Q 2012. In addition, the real value of construction works fell by 2.7% yoy in 1Q 2012 amid the completion of large infrastructure projects related to the Euro 2012 football championship. As the impact of adverse weather conditions of the last two winter months subsided, so also did demand for energy resources. Thus, production of electricity, with growth of 12.3% yoy in February, contributed strongly to industrial sector performance that month, but was only 0.1% yoy higher in March 2012.
On the upside, however, economic growth was supported by strong domestic consumption. Underpinned by a 14.7% yoy increase in real wages, retail sales turnover rose by 14.2% yoy in 1Q 2012. Furthermore, fears that severe frosts during January-February could further damage winter agricultural crops did not materialize. As a result, agricultural output growth slightly accelerated to 0.7% yoy in March, while the official 2012 grain harvest forecast was improved to 45-50 million tons. Overall, however, according to provisional estimates, real GDP growth slowed to 1.8% yoy in 1Q 2012, which is in line with our full-year forecast of about 3% yoy in 2012.
Despite weaker exports, Ukraine’s balance of payments kept improving in March. The current account deficit narrowed to $0.3 billion in March as the decline in imports outpaced exports. Furthermore, thanks to lower population demand for foreign currency and solid foreign trade credit inflows, the financial account surplus more than covered the current account gap. As a result, the Hryvnia exchange rate remained virtually stable over the month, while the National bank of Ukraine slightly augmented its gross
international reserves to $31.1 billion at the end of March.
For 1Q 2012, the state budget stayed in surplus thanks to stronger than expected budget revenue growth. State budget proceeds grew by a nominal 16.3% yoy in 1Q 2012 compared to a full-year target of 5.8% yoy. Abovetarget revenue growth, achieved mainly due to tighter administration of taxes, led the government to amend Ukraine’s state budget law to increase social expenditures. However, as the revenue plan was amended to fully cover expenditure increases, the state budget deficit target was left unchanged at 1.7%of GDP. Correspondingly, we kept our full-year consolidated public sector deficit forecast (including Naftogaz and pension fund deficits) at about 3.5% of GDP in 2012.
On the inflation front, Ukraine kept benefiting from a favorable base effect and low food price growth. Consumer inflation eased to 1.9% yoy in March, one of the lowest levels in the region. Given the considerable progress in reducing inflation in 1Q 2012, our year-end inflation forecast was revised downwards to 7-8% yoy in 2012.Despite better than projected performance in 1Q 2012, the Ukrainian economy remains fragile. The health of the external sector and sustainability of public finances are the main macroeconomic challenges for Ukraine. Thus, high external financing needs may generate depreciation pressures during the year. Due to announced fiscal loosening, with most spending increases being recurrent, fiscal consolidation will proceed slower than projected.
Although public debt in terms of GDP is not large by international standards (37% of GDP in 2011), high debt service payments narrow the government’s room to maneuver in case of adverse developments. Furthermore, high public debt service needs amid turbulent international financial markets have increased the government reliance on domestic debt securities. To attract sufficient funds, the government accepts rather high yields on short maturities and is expanding the supply of riskier debt instruments, such as foreign currency denominated domestic bonds. In addition, the issue of public debt seems to crowd out bank credit to the private sector. The growth of bank loans to the private sector moderated to 6.6% yoy in March compared to 8.3% yoy a month before and 9.6% yoy in 2011.
Ukraine macroeconomic situation. April 2012
