Ukraine. Macroeconomic Situation. SigmaBleyzer, March 2011

In February 2011, the Ukrainian economy maintained a good pace of growth. Most of the sectors improved their performance compared to the previous month thanks to high world prices on steel, robust growth in Ukraine’s main trade partner countries and strengthening domestic demand. Industrial production growth accelerated to 10.5% yoy in February as stronger increases in metallurgy, machine-building and production of utilities compensated for some deceleration in the chemical industry and stagnation in food processing. Retail trade turnover, typically used to gauge private consumption patterns, picked up by a solid 12.7% yoy. Due to colder weather during February-March 2011, Ukraine started the spring sowing campaign later than projected. While the delay may negatively affect yields, better conditions than last year for winter crops allowed the government to project a slightly higher grain harvest at about 41-42 million tons in 2011. Despite betterthan-forecast growth momentum in the first two months of 2011, we maintain our real GDP growth forecast at 4% yoy in 2011.

Robust real sector growth, higher tax rates, the improving financial stance of Ukrainian corporate enterprises and banks as well as abolishment of the 11-month reporting period for corporate profit tax (EPT) helped raise budget revenues by an impressive 44.5% yoy for the first two months of the year. Larger VAT refunds in March and a vanishing EPT base effect were likely the main reasons of more moderate but still impressive growth in budget revenues over the first quarter. As government spending grew quite moderately over January-February, the state budget was in a large surplus over the period. Budget performance could weaken in the coming periods. Revenue growth may continue decelerating due to enforcement of EPT rate reduction and small business privileges on April 1st and government plans to reduce excises in order to soften inflation pressures. Expenditures, on the other hand, may increase amid postponement of reform measures and initiatives to relax budget spending. Weaker reform implementation led to a delay in disbursement of the IMF tranche. The delay is likely to have a neutral impact on the Ukrainian economy as there is a good degree of confidence that co-operation with the IMF will continue. Favorable budget performance over the first quarter of 2011 may be a strong argument for the IMF to tolerate more gradual reform implementation.

Ukraine. Macroeconomic Situation. SigmaBleyzer, March 2011