Emerging

Under pressure

Ukraine  
December 2012  
Ukraine  
Under pressure  
Economic indicators slipped into negative territory in Q3. To face up to currency pressures, the authorities decided to make  
exporters convert 50% of their export revenues into local currency. The measure is to remain in effect for six months, while  
waiting for the economy to improve or the country to reach a new agreement with the IMF. Despite bad news on the  
economic front, the government has successfully issued 10-year Eurobonds that will enable it to refinance the next IMF  
tranche falling due. The bond issue was none too late, right before the country’s sovereign rating was downgraded by two  
of the three major rating agencies.  
„
Economic indicators slip into the red  
Real GDP contracted in Q3, down 1.3% year-on-year (yoy)  
after two quarters of weak growth (2% yoy in Q1 and 3% in  
Q2). Industrial production also slipped into negative territory  
1 Recession  
% of GDP  
GDP (yoy)  Retail sales  Industrial production  
(chart 1), declining by 1.4% yoy over the first 10 months of the  
40  
year. In iron and steel, the main industrial sector, activity  
contracted 5%. Revenues from steel exports plunged 15% in  
current dollars, but for the moment the decline has been offset  
by other sectors. Even so, total exports rose only 1.4% qoq in  
value terms in the first 9 months of 2012, reflecting the  
sluggish global demand.  
3
0
20  
10  
0
-10  
-
20  
The agriculture was unable to offset the shock in the iron and  
steel sector. The grain harvest fell far short of expectations  
with a 5.1% yoy decline in production in the first 10 months of  
-30  
-40  
2012, compared with a 17% yoy increase in the same period  
2008  
2009  
2010  
2011  
2012  
of 2011. Lastly, construction and merchandise transport  
declined 10.2% and 6.4%, respectively, completing this  
portrait of an economy in recession.  
Source: UkrStat  
„
Exchange controls support the currency  
The spread between the official exchange rate (still at  
UAH7.99 per dollar) and the market exchange rate (about  
UAH8.2 per dollar) has gradually widened since early 2012.  
Devaluation pressures are still strong. First, the downturn in  
the global steel market is straining export revenues. Second,  
buoyant domestic demand continues to fuel import growth. As  
a result, both the trade and current account deficits have  
widened. The trade deficit hit US$11.5bn in the first 9 months  
„
In contrast, demand remains buoyant  
Retail sales increased 14.8% yoy in real terms in the first 10  
months of the year (chart 1). Investment is also holding up, as  
illustrated by a record increase of 17% in the first 9 months of  
the year. Yet after a very dynamic first half, investment  
spending has stagnated since Q3 2012.  
„
Zero inflation  
(9% of GDP) and the current account deficit came to $8bn in  
Consumer price inflation was zero in October for the third  
consecutive month, despite the increases in pensions and  
social benefits, the new wave of reimbursements for deposits  
lost to hyperinflation in the early 1990s (UAH1000 per deposit)  
and the 14% annual growth in nominal wages. Although  
consumption is holding up well, lending refuses to pick up  
the first 8 months (7% of GDP).  
Anticipating devaluation, households are actively converting  
their savings into foreign currency. Over the first 10 months of  
the year, households purchased US$9.9bn. Along with the  
current account deficit, this dollarization of household savings  
(+2% yoy in nominal terms in September 2012): the banking  
(
which de facto speculate against their own currency) is  
sector has not yet finished restructuring after the 2009 crisis  
and the economy is still mired in a deleveraging phase.  
weighing on foreign reserves, which have declined by $6bn  
since the beginning of 2012 to a total of US$25.3bn in the  
early December.  
To stabilise the situation, the central bank (NBU) resorted to  
th  
new exchange control measures. Since November6 , and for  
a period of 6 months, exporters are required to convert 50% of  
their export revenues into the local currency. This measure  
should ensure a recurrent supply of $2.5bn to $3bn a month in  
14  
economic-research.bnpparibas.com  
Ukraine  
December 2012  
the local forex market. In the very short term, the measure  
was effective. By the second half of November, the spread  
between official and market exchange rates narrowed and  
interbank rates dropped back below the key policy rate (chart  
prices for households, even though this is one of the IMF’s  
main recommendations. Despite pension reforms, the pension  
fund subsidy will grow. It is expected to reach 5.3% of GDP in  
2013, after an estimated 4.3% in 2012. The government  
intends covering the 2013 deficit mainly by domestic  
borrowings. It plans to borrow UAH93bn on the domestic  
market (UAH48bn net of reimbursements). External financing  
should cover the rollover of debt reaching maturity.  
2). Yet currency controls are only a stop-gap measure. They  
only postpone and possibly smooth adjustments, until a new  
agreement can be reached with the IMF, which would lend  
credibility to a new currency policy and the eventual greater  
flexibility currency. Unfortunately, negotiations are at a  
standstill: the IMF delegation preferred to postpone talks until  
mid January.  
After issuing $2bn in July and $0.6bn in September, the  
government successfully placed a new 10-year bond of  
th  
$
1.25bn on November 20 bearing an interest rate of 7.8%.  
„
Legislative elections: no real change  
These new bond issues, the government is able to reimburse  
its stand-by credit instalments ($1bn fell due in November,  
$0.4bn will fall due in January 2013 and another $1bn in  
February 2013). Ukraine needs to reach a new agreement  
with the IMF because it must reimburse a total of $5.8bn to  
the international institution in 2013 (4% of GDP).  
The legislative elections in October 2012 did not change the  
political landscape. The Party of Regions still dominates with  
1
87 seats out of 450 (42%) in the new parliament or Rada. It  
can also count on the support of the Communists (32 seats,  
% of the total), the United Centre (3 seats) and part of the 45  
7
independent seats. The opposition maintains considerable  
power, even though it has failed to impose itself: no political  
force can claim a constitutional majority. Nicolas Azarov was  
approved as a prime minister again by the new Rada.  
„ Rating agencies are not convinced  
The stabilisation of the exchange rate (albeit via heterodox  
measures), the adoption of the 2013 budget and the  
government’s capacity to issue bonds under tense market  
conditions failed to convince the credit rating agencies.  
Moody’s downgraded Ukraine’s sovereign rating by one notch  
to B3 on 6 December and S&P followed suit on 7 December  
with a B rating. Both agencies issued a negative outlook. They  
are both sceptical about the Ukrainian government’s capacity  
to refinance debt maturing next year ($7.2bn in 2013) at a  
time of uncertain growth and fierce pressures on foreign  
reserves.  
„
2013 budget: dithering with the IMF  
Before leaving power to the new parliament, Rada deputies  
adopted the 2013 budget on 6 December. The budget is  
calculated on the basis of growth and inflation forecasts of  
3.4% and 4.8%, respectively, which seem optimistic in the  
light of recent trends. The government expects nominal  
revenue growth of 7%, while spending remains virtually  
unchanged, demonstrating a certain conservative streak.  
The official forecast for the 2013 deficit is UAH50bn (4.5% of  
GDP). This figure includes compensation to Naftogaz for  
losses due to the obligation to sell natural gas to individuals  
below the costs. Compensation should diminish somewhat to  
UAH8bn (0.6% of GDP) in 2013, from UAH12bn (0.9% of  
GDP) in 2012. Yet the government does not intend to raise  
Anna Dorbec  
anna.dorbec@bnpparibas.com  
2
Domestic liquidity: ups and downs  
Summary  
KIBOR 0/N  KIBOR 3m  Refinancing rate (0/N lombard rate)  
2011 2012f 2013f 2014f  
6
0
Real GDP growth (%)  
5.2  
8.0  
0.5  
0.7  
0.7  
5.8  
2.5  
7.7  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
50  
-1.4  
-4.9  
-5.0  
-2.9  
40  
40.6 46.1 56.2 59.1  
-5.9 -7.0 -3.3 -3.9  
76.5 79.9 92.0 92.2  
Current account balance / GDP (%)  
External debt / GDP (%)  
30  
20  
Forex reserves (USD bn)  
30  
22  
17  
21  
Forex reserves, in months of imports  
Exchange rate UAH/USD (year end)  
3.7  
8.0  
2.6  
8.2  
2.2  
9.8  
2.3  
9.7  
1
0
0
0
1/12  
04/12  
07/12  
10/12  
Sources: IMF, local sources, BNP Paribas  
f : BNP Paribas Forecasts  
Source: DataStream  
15  
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