Expansion of the Ukrainian economy remained strong in October, despite continuing growth moderation in the industrial sector. According to NBU estimates, real GDP growth exceeded 5% yoy for January-October 2011. The growth was fuelled by agriculture, construction and domestic trade. In particular, thanks to a record high harvest of crops and vegetables, output growth in the agricultural sector sped up to 16.6% yoy over the period. Construction advanced by 11.7% yoy, underpinned by the realization of large infrastructure projects related to Ukraine cohosting the Euro 2012 football tournament. Retail sales grew by 14.9% yoy over the period amid strong real wage growth (8.3% yoy in October). At the same time, growth in industrial production eased to 4.7% yoy in October.Due to a worsening external environment, export-driven metallurgy, chemicals and machine building slowed to 5% yoy, 3% yoy and 13% yoy, respectively, in October. Real GDP growth is projected to moderate to about 4.5% yoy for the year 2011 and to 3.5% yoy in 2012.
Thanks to a remarkably good harvest, which caused an unusual drop in food prices during the autumn months, consumer inflation eased to 5.4% in October. Given that foodstuffs account for more than 50% of overall CPI and the government’s reluctance to raise natural gas tariffs to population, year-end inflation is now projected to stay at around 6% yoy in 2011, notably undershooting the official forecast of 8.9% yoy.
Despite substantial disinflation progress over the last few months, the NBU has been following a tight monetary policy. Sizable NBU forex interventions during September-October, sterilization operations and Hryvnia deposit outflow (due to Hryvnia depreciation fears) caused a severe liquidity squeeze in the banking system during September-November. By keeping banking liquidity tight, the NBU tried to reduce Hryvnia depreciation pressures. As a result, the Hryvnia traded within a very narrow band of UAH 8.00-8.02 per USD during these months. Given the still high international reserves ($34.2 billion at the end of October), the Hryvnia exchange rate is projected to remain at around UAH 8.0 per USD through the rest of the year.
In October 2011, due to a downward correction of world commodity prices, easing external demand and limited grain exports, total export of goods moderated to 21% yoy, contributing to a widening current account deficit. The current account deficit exceeded $7 billion for JanuaryOctober 2011 and is projected to reach 5% of GDP for the whole year. Although the capital and financial account improved in October as a result of a higher CA gap, NBU international reserved declined to $34.2 billion. Given the gloomy export outlook and high external debt financing needs in 2012, Hryvnia stability in the longer term looks quite challenging. Furthermore, the prospects of IMF cooperation with Ukraine still remain unclear.
Thanks to robust economic performance and stricter tax administration, the state budget deficit stood at less than 1% of GDP for January-October. However, due to higher Naftogaz and Pension Fund imbalances, the broad fiscal deficit target will be missed. The government hopes that successful negotiations with Russia to reduce the natural gas import price will allow them to keep gas tariffs unchanged in 2012 as well. However, as the IMF sees this measure as a binding condition to balance Naftogaz and sustain public sector finances, it is likely to remain a principal requirement to resume IMF lending. In addition to the politically painful requirement to raise natural gas tariffs to population, the IMF mission raised concerns over the feasibility of the 2012 budget deficit target as it was developed based on an overly optimistic macroeconomic forecast.
Although the government announced it will revise its real GDP forecast for 2012downwards, there is high risk that cooperation with the Fund will be kept “on hiatus” until after the parliamentary elections. At the same time, assuming relatively favorable external developments, the Hryvnia is projected to remain either stable or to depreciate relatively moderately to about UAH 8.5 per USD in 2012. However, the downside risks are rather high for this forecast.
Ukraine. Macroeconomic Situation. SigmaBleyzer, November 2011
