Emerging

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13  
EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
Ukraine  
At the mercy of the IMF  
Ukraine’s economy has stabilised somewhat after the crisis in 2014-2015. The economic recovery is still on track. Thanks to tight  
monetary policy, inflation has been moderating and the Hryvnia has been broadly stable despite emerging market tensions. The  
government has met its fiscal targets and reformed the gas and banking sectors. But the economy is not yet out of the woods.  
Ahead of the presidential elections (March 2019), (geo)political risks are high. Structural reforms need to be completed to  
strengthen investors’ confidence. Given large FX debt repayments in the coming year, Ukraine needs to unlock new financing from  
the IMF and other official lenders as well as global markets in order to avoid liquidity shortages.  
A macroeconomic stabilisation of sorts…  
1- Forecasts  
The macro adjustment that followed the recession and devaluation  
of 2015 is over. On the positive side, following a 16.5% cumulative  
contraction in real GDP in 2014-2015, economic activity regained  
some steam from 2016, underpinned by domestic private demand  
and the government’s fiscal stimulus. Inflation returned into single  
digit territory in June 2018 thanks to a hawkish central bank. The  
economic recovery has gone hand-in-hand with fiscal consolidation  
in 2017. The budget deficit was 1.5% of GDP last year and public  
debt declined to 72% of GDP from a peak of 81% of GDP in 2016,  
notably thanks to the government’s increasing difficulties in tapping  
international debt markets.  
2
016  
2017 2018e 2019e  
Real GDP growth (%)  
2.4  
2.5  
3.5  
2.5  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
13.9  
-2.9  
14.4  
-1.5  
11.3  
-2.6  
7.5  
-2.3  
81.2  
-4.1  
71.8  
-3.7  
71.0  
-4.4  
70.1  
-4.1  
Current account balance / GDP (%)  
External debt / GDP (%)  
121.8  
15,5  
106.6  
18,8  
98.2  
17,0  
94.7  
16,7  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDUAH (year end)  
3.6  
3.7  
3.2  
3.0  
27.1  
28.1  
28.3  
30.3  
e: BNP Paribas Group Economic Research estimates and forecasts  
On the negative side, the current account deficit (CAD) has been  
widening again due to higher energy prices and stronger domestic  
demand. The 35% fall in export volume since 2011 highlights  
Ukrainian exporters’ difficulties to diversify away from Russia. In  
addition, the US decision to impose tariffs on steel has started to  
depress global prices for steel, which is one of Ukraine’s main  
commodity exports. Foreign direct investment has declined  
markedly since 2013 due to Euromaidan events, the Crimea crisis  
and the Donbas conflict. They do not offset the CAD and make  
Ukraine dependent on debt-generating capital inflows, notably  
official financing (see infra).  
2- GDP growth and inflation  
Real GDP growth (y/y % change, lhs)  Inflation (y/y % change, rhs)  
10  
5
60  
50  
40  
30  
20  
10  
0
0
-5  
Since the beginning of the year, activity has accelerated further.  
Real GDP grew by 3.8% y/y in Q2 after 3.1% in Q1. Household  
consumption (+4.2% in Q2) has been supported by 1/ the steady  
pace of wage growth after several years of austerity (the minimum  
nominal wage was increased by 16% in 2018), 2/ social transfers  
-10  
15  
-20  
-
2014  
2015  
2016  
2017  
2018  
(
pensions were increased in October 2017 and March 2018), 3/  
emigrated workers’ remittances (thanks to visa-free entrance to the  
EU, notably in Poland), and 4/ fast consumer credit growth.  
Investment has been expanding at double-digit annual rates for two  
years (+14.2% in Q2). Meanwhile, the contribution of net exports to  
GDP growth has continued to be negative. On the supply side,  
agriculture performed very well in Q2, thanks to an early harvest  
season, and construction has continued to boom.  
Source: State Statistics Service of Ukraine  
relative stability of the Hryvnia (USDUAH flat year-to-date and down  
only 3% since July) has had a positive impact on the prices of  
imported goods. Fourth, the monetary policy has remained tight.  
In light of sustained core inflation pressure and external risks, the  
central bank (NBU) has continued to increase its policy rate (+350  
basis points year-to-date to 18% in September) to help headline  
inflation converge to its end-of-year target range of 4%-8%. The  
NBU identified risks arising from a pick-up in consumer demand, a  
sell-off in emerging markets, tighter US monetary policy, global  
trade disputes and tensions between the IMF and Ukraine’s  
authorities (see infra).  
Headline inflation has been trending downward since March and  
stood at 8.9% y/y in September, despite robust domestic demand  
and wage growth. First, a good agricultural harvest and lower global  
meat prices have eased pressure on food prices. Second, the  
increase in utility prices has slowed thanks to a high base effect.  
Third, Ukraine moved to a flexible FX rate regime in 2014, and the  
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14  
EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
During January-August 2018, the CAD widened again (USD 2.1 bn  
against USD 0.8 bn a year earlier), as the increase in the services  
balance surplus and net transfers (i.e. workers’ remittances) did not  
compensate for the larger trade balance deficit. While export  
earnings increased 11.6%, the import bill climbed by 15.3%.  
Ukrainian exports to the EU and Russia now account for 38% and  
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- Estimated government debt repayment profile (USD bn)  
 Internal debt : interest payments  Internal debt : redemption  
 External debt : interest payments  External debt : redemption  
5
7
% of total exports, respectively.  
4
3
2
1
0
but the heavy FX debt service makes an IMF deal  
critical  
An IMF mission visited Kiev in mid-September in order to assess the  
status of its extended fund facility (EFF). Completing the review of  
the four-year IMF programme, which is due to expire in March 2019,  
will be instrumental to help the government cover its high FX debt  
refinancing needs and avoid FX liquidity shortages in the coming  
year. This peak of debt repayments comes at the time of tightening  
global financing conditions and heavy political agenda with the  
presidential elections scheduled for March 2019. Ukraine’s  
sovereign Eurobond spreads have climbed 150 basis points year-to-  
date to 570 basis points as of mid-October.  
4
Q 2018  
1Q 2019  
2Q 2019  
3Q 2019  
4Q 2019  
Source : Ministry of Finance, BNP Paribas  
corruption) and the increase in the price of gas for households, on  
which the financial sustainability of Naftogaz depends.  
Ahead of the elections and given an unsuccessful privatisation  
process, markets have been concerned about the government’s  
ability to keep its budget deficit below the targeted 2.5% of GDP in  
and the banking system remains fragile  
2
018, a key precondition of the IMF programme. But despite fiscal  
The Ukrainian banking sector is still recovering. Following the  
nationalisation in 2016 of the insolvent PrivatBank, the largest retail  
bank, the government now controls more than half of the banking  
sector assets. Many smaller banks have been shut down since 2014  
and the capitalisation of the remaining viable banks has improved.  
The central bank has set the end of 2018 as the deadline for banks  
to recapitalise. Minimum capital adequacy ratios have been  
increased from 5% in 2016-2017 to 7% in 2018 and should be  
restored to 10% in 2019.  
easing, insufficient external financing may prevent a spending spree  
and “help” the government to comply with its 2018 budget deficit  
target.  
Despite deleveraging by the private sector, the country’s external  
debt is still high at around 100% of GDP (vs. 130% in 2015), of  
which 47% is public debt. It is very sensitive to currency  
depreciation given the low level of FX reserves (USD 17.2 bn or just  
below three months of import cover) and huge external financing  
needs. As for the government’s FX debt service, Ukraine has to  
repay USD 10.7bn in H2 2018 and 2019, of which USD 4.3 bn are  
domestic FX bonds and USD 4.7 bn are interest payments. Ukraine  
returned to global markets in September 2017 by issuing a  
USD 3 bn Eurobond. But the government has failed to secure new  
external financing in 2018 and has had to resort to the local debt  
market to cover its financing needs. The increase in local interest  
rates made domestic debt in Hryvnia attractive for both local and  
foreign investors in Q1 2018. But the appetite for local-currency  
denominated debt has waned since Q2, forcing the government to  
issue additional foreign-currency denominated bonds.  
The banking system returned to profitability in 2018, after  
experiencing losses in 2014-2017. Net interest rate margins have  
increased as growth in banks’ deposit rates has lagged the surge in  
lending rates. Nevertheless, the overall liquidity ratio remains  
constrained as loans exceed deposits by 20%. Banks’ profitability  
and ability to issue new loans to households and corporates are  
also undermined by the pile of non-performing loans (56% of total  
loans as of mid-2018), which have required additional provisioning  
(94% of loans are fully provisioned).  
Credit to corporates increased by 6% y/y in June 2018. Local  
companies have tended to borrow more in local currency while  
restructuring FX loans. Meanwhile, after more than two years of  
stagnation, credit to households climbed by 44% y/y in mid-2018,  
driven by consumer loans and auto loans, while mortgage loans  
remained stagnant.  
The disbursement of the fifth tranche (USD 1.9 bn) of the  
USD 17.5 bn IMF loan (of which only USD 9 bn have been  
disbursed so far) has been suspended since April 2017 as the  
Ukrainian government has not met the IMF’s preconditions.  
Securing the loan tranche would pave the way to further financing  
emanating from other multilateral lenders (notably USD 1.1 bn from  
the European Union and USD 800 mn from the World Bank) and  
international capital markets. Currently, the disbursement of these  
funds is conditional on greater fiscal rigour, the completion of  
structural reforms (most notably those designed to fight against  
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.
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