Emerging

Economic growth picks up, but not employment

Ukraine  
Economic growth picks up, but not employment  
After a severe political and economic crisis, the economy has swung back into growth. Stabilisation of the exchange rate laid the  
groundwork for lower inflation. The central bank has begun to ease monetary policy, but for the moment it has not yet had an  
impact on lending, which continues to contract. The IMF programme has encountered new delays: it is conditioned on the  
implementation of pension reform, which will not be adopted before fall. The recovery is too tepid to create jobs, and numerous  
Ukrainians have left to seek work in neighbouring countries. Exports are picking up, and will now receive greater EU support. The  
difficult situation in the eastern part of Ukraine (embargo, armed conflict) hampers a veritable industrial recovery.  
After a severe political and economic crisis in 2014 and 2015,  
1- Forecasts  
Ukraine has returned to relative stability, which has enabled it to  
swing back into growth. Yet growth seems to be too mild to fuel a  
rapid catching-up movement. Ukraine reported GDP growth of 2.3%  
in 2016 and 2.5% year-on-year in first-quarter 2017. The national  
bank’s Primary Sectors Index, a leading indicator of growth,  
increased 2.4% year-on-year in the first five months of 2017,  
signalling an ongoing recovery.  
2
015 2016 2017e 2018f  
Real GDP growth (%)  
-9.8  
2.3  
1.8  
2.8  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
48.7 13.9 11.0  
8.9  
-1.2 -2.2 -3.0 -2.6  
79.3 81.2 84.2 79.5  
-0.3 -3.6 -3.6 -3.7  
Current account balance / GDP (%)  
External debt / GDP (%)  
Industrial activity began to recover in H2 2016, but is now being  
hampered by new trade barriers (see below). Industrial output  
contracted again, down 1% year-on-year in the first five months of  
130.6 121.7 116.8 107.5  
13,3 15,5 17,5 18,5  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate UAH/USD (year end)  
3.2  
3.6  
3.8  
3.7  
2
017, after increasing 3% in 2016.  
23.4 26.2 27.5 29.0  
Inflation levels off after the exchange rate stabilises  
e: BNP Paribas Group Economic Research estimates and forecasts  
The exchange rate has remained relatively stable since early 2016.  
This stabilisation has helped to anchor inflation expectations, which  
are declining gradually. After a record high of 48% in 2015, inflation  
dropped to an average of 14% in 2016. This easing trend has  
continued, albeit at a slower pace, since the beginning of the year,  
to an average of 13.5% year-on-year in the first five months of the  
year.  
2
- Inflation levels off following the exchange rate stabilisation  
Currency depreciation  Inflation rate  
%, annual  
70  
6
0
0
5
With this stabilisation, the central bank has been able to gradually  
ease monetary policy. After peaking at 30% in 2015, the key rate  
was steadily reduced to 12.5% in May 2017. Yet financing  
conditions are still restrictive, with short-term lending rates  
averaging 16.3% in April. Banking sector restructuring is still  
incomplete, which limits the possibilities of lending rebound. Credit  
volume contracted for the third consecutive year. In April 2017, the  
total volume of bank lending to the non-financial private sector was  
down 6% compared to April 2016.  
40  
30  
20  
10  
0
2014  
2015  
2016  
2017  
Sources: UkrStat, National Bank of Ukraine  
Vital need for IMF support  
land sales, and comprehensive pension reform, which aims to  
restore the viability of a system that is currently running up deficits.  
Neither of these reforms will be ready before summer, which means  
the next instalment will be postponed until fall at the earliest.  
The country continues to benefit from IMF support, which released a  
new USD 1 bn instalment in April 2017. The USD 17.5 bn funding  
programme launched in March 2015 was supposed to end in 2019,  
but there have been some delays with respect to the initial calendar.  
In April 2017, only half of the funds had been used. The support of  
international donor funds is still vital for external liquidity. In May  
Agrarian reform is still a very sensitive topic. Although it is needed to  
boost the country’s agricultural potential, it is very unpopular: local  
investors, notably small farmers who are under severe financial  
restraints due to domestic financing conditions, fear the massive  
arrival of non-resident investors. To allow the government more time  
to negotiate a compromise arrangement, the IMF now seems to be  
ready not to consider the full completion of this reform as a  
necessary precondition for the release of a new instalment.  
2
017, the USD 12.5 bn in debt with the IMF accounted for 71% of  
the central bank’s currency reserves (USD 17.6 bn).  
Continuing the programme is thus crucial for the country’s external  
liquidity. It is also a necessary condition for the government’s plans  
to issue Eurobonds in 2017. The pay out of another USD 1.9 bn  
instalment is conditioned on the implementation of two major  
reforms: agrarian reform, including the lifting of a moratorium on  
economic-research.bnpparibas.com  
Ukraine  
3rd quarter 2017  
17  
Pension reform is the other thorny issue. According to the  
memorandum of understanding between the Ukrainian government  
and the IMF, the reform must be fully adopted by January 2018. The  
project approved by the Cabinet in mid-May 2017 calls for the  
alignment of the retirement age at 60, with 25 years of mandatory  
contributions (vs. 15 years today). Given that more than a third of  
Ukraine’s economy is now in the informal sector, further increasing  
the duration of mandatory contributions risks placing people who  
have pursued mixed careers in both the formal and informal sectors  
in a situation of extreme poverty on retirement. The number of years  
of mandatory contributions will gradually increase to 35 years in  
3
_
-
- Employment remains in the doldrums  
_ Jobless rate (seasonally adjusted, LHS)  
- - Total employment (seasonally adjusted, RHS)  
in % of active population  
%
2
population  
active  
million of people  
25  
24  
de la  
1
1
0
2
3
2
2
8
6
4
2
0
21  
20  
19  
18  
17  
2
028, with incentives to postpone retirement until age 63-65. The  
government has pledged to index pensions to average wage growth  
and inflation, while maintaining the system’s financial equilibrium.  
16  
Ukraine’s fiscal performance is still satisfactory, although it has  
deteriorated slightly since 2015. At 2.2% of GDP, the fiscal deficit  
complies with the performance criteria imposed by the IMF  
programme. Excluding debt servicing, the budget generates a  
surplus of 1.9% of GDP. With the increase in the debt-to-GDP ratio,  
which reached 81% of GDP in 2016, debt servicing costs are rising.  
From only 2% of GDP in 2012, it exceeded 4% of GDP in 2015 and  
15  
2005  
2007  
2009  
2011  
2013  
2015  
2017  
Sources: UkrStat, Datastream, BNP Paribas  
Exports pick up  
2
016. There are also the new banking sector restructuring charges,  
with the injection of an extra UAH 39 bn (1.5% of GDP) in  
Privatbank, the country’s main bank. Privatbank was nationalised in  
December 2016, and has already been recapitalised for the  
equivalent of 6.5% of GDP.  
After four years of uninterrupted decline, during which exports were  
virtually slashed by half, the year 2017 looks much brighter. Exports  
of goods rebounded 27% year-on-year in value in the first 5 months  
of 2017. This rebound was accompanied by a 10% increase in  
revenues from service exports.  
Jobs are created elsewhere  
The European Parliament’s decision in July 2017 to expand the  
preferential trade regime should provide greater export support,  
notably in the agro-food sector. The European decision eliminates  
custom duties on imports of Ukrainian products and increases  
quotas (which were too restrictive, because Ukrainian exporters  
filled the quotas for most of the goods in this regime in less than a  
quarter). Tariff-free import quotas will increase by 2,500 tonnes for  
honey, 3,000 tonnes for canned tomatoes, 65,000 tonnes for wheat,  
625,000 for corn and 325,000 tonnes for hops. The EU Council is  
expected to definitively adopt this decision toward the end of July,  
providing support for farm exports as of the 2017 harvest.  
Despite the return to growth, employment was still in decline in early  
017, the fourth consecutive year of contraction. From a 2013 peak,  
the Ukrainian economy has lost 4.6 million jobs, or 22% of the total.  
Consequently, the unemployment rate has held at 11% of the active  
population in Q1 2017 (Chart 3).  
2
Emigration has become the solution for many unemployed  
Ukrainians. The rebound in growth in neighbouring Poland triggered  
a spectacular decline in unemployment and the emergence of  
labour market tensions, creating an attractive opening for non-  
residents. According to unofficial estimates, more than a million  
Ukrainians crossed the Polish border in search for work in 2016. In  
Russia, which is struggling with the same negative demographic  
tendencies as Poland, the upturn in growth is also generating  
demand for skilled labour (mainly from the regions of eastern  
Ukraine). In Russia, Ukrainian workers benefit from simplified hiring  
conditions, but wage conditions are often less favourable than in  
Poland. In May 2017, the average wage in Ukraine was only 23% of  
the Polish average and 36% of the Russian average.  
The main risk for the recovery of exports is the persistent hostilities  
in the Donbass region, the country’s main mining and industrial  
basin. The conflict is festering and hopes for a diplomatic solution  
are fading. Since mid-March 2017, following the blockade imposed  
by nationalist forces, the Ukraine Security Council has officially  
enacted an embargo on trade with the separatist regions.  
As a result of this outflow of labour, private transfers to Ukraine rose  
to USD 4 bn in 2016, the equivalent of 4% of GDP. They rose 10%  
in nominal terms in 2016 and 7% year-on-year in the first 5 months  
of 2017.  
economic-research.bnpparibas.com  
Ukraine  
3rd quarter 2017  
18  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
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