Regaining political stability is particularly needed in Ukraine, whose economy was hit severely by the international liquidity crisis. In 2009, real GDP fell by 15% yoy, one of the deepest declines in the world. Although the economy started to show signs of improvement in 2Q 2009, the recovery was rather slow. The beginning of 2010 was encouraging as Ukraine’s industrial sector reported almost 12% yoy growth on the back of rebounding external demand for Ukraine’s exports and a favorable base effect. On the other hand, domestic demand is likely to remain subdued, exerting a toll on economic growth, forecast at a moderate 3% yoy in 2010.
Public finances were under significant strain during 2009. Deep economic recession, banking sector weakness and the forthcoming presidential election resulted in the overall budget deficit surging to 11% of GDP. As current expenditures comprise the lion’s share of budget spending and there should be moderate recovery in economic activity, rebalancing public finances should be the main priority and the hardest challenge for Ukrainian authorities in 2010. In the short-term, Ukraine seems to have no alternative but to resume the IMF program.
On a positive note, Ukraine’s external imbalances notably declined during 2009. The current account deficit shrank to 1.7% of GDP in 2009 and is forecast to be virtually balanced in 2010. Thanks to IMF and other IFIs financing as well as a high private external debt rollover ratio, external financing needs were successfully met in 2009. Although external debt financing requirements remain high in 2010, they are substantially lower than in the previous year. Moreover, with likely restored political stability and a resumed IMF program, the needs look quite manageable. The reduced vulnerabilities of the Ukrainian economy have already changed the outlook for Ukraine’s national currency. Stabilized in the fall of 2009 at about UAH 8.0 per US Dollar, the currency may remain stable at this level during 2010, though there are a number of downside risks to this scenario.