June 19, 2012
April’s data for Ukraine’s real sector showed a mixed picture. Buoyed by strong real wage growth, retail sales accelerated to 14.8% yoy over January-April. Agriculture also gained momentum, expanding by 1.1% yoy over the period amid a larger spring sowing area. Although industrial production was flat in April compared to the same month of the previous year, it was an improvement from March’s decline. The improvement may be attributed to a lower decline in metallurgy, which benefited from the stabilization of world steel prices, though at a low level. In addition, machine building growth recovered amid higher demand from CIS countries. At the same time, the decline in construction and cargo transportation deepened due to completion of large infrastructure projects and lower supply and transit of fossil fuels, respectively.
Fiscal performance was favorable for the first four months of the year thanks to solid budget revenue growth. However, fiscal loosening, in effect since May, and large external public debt service payments (due in late May and June) raised public sector liquidity concerns. These concerns notably eased at the end of May as Ukrainian authorities reached a $2 billion VTB loan rollover deal. In addition, the government has accumulated significant cash balances on its accounts thanks to large privatization receipts and extensive domestic borrowings in both national and foreign currencies.
Consumer inflation kept slowing and reached an almost decade low level of 0.6% yoy in April. Ongoing disinflation was principally the result of food deflation, as a record high 2011 harvest and improved crop outlook for 2012 affected foodstuff prices. At the same time, moderate monetary aggregates growth also contributed. Although monetary authorities are taking steps to stimulate bank lending, the effectiveness of these measures is undermined by the NBU’s Hryvnia exchange rate stability target. Thus, to keep Hryvnia fluctuations within a narrow band, the NBU continued to tightly control banking sector liquidity.
Ukraine’s Balance of Payments improved for the second month in a row. Thanks to higher volumes of grain exports and heavy machinery deliveries to CIS countries, exports restored growth in April, advancing by 3.2% yoy. However, imports also gained momentum, supported by strong domestic demand. At the same time, a higher current account deficit was more than covered by stronger private (or quasipublic) external debt inflows. As a result, Hryvnia remained virtually stable over April, while the NBU augmented its gross international reserves to $31.7 billion as of end of the month. Larger foreign debt payments due at the end of May and in June, combined with stronger demand for foreign currency (likely related to seasonal repayment of dividends abroad), resulted in higher Hryvnia depreciation pressures at the end of May. Available NBU international reserves, recent large public debt rollover deal and anticipated foreign currency inflows, related to the Euro-2012 football championship, give reason to suggest that these pressures may be temporary and successfully mitigated through NBU interventions.
Ukraine macroeconomic situation. May 2012