S&P Global Ratings has revised higher its projections for Ukraine’s real GDP growth in 2019 from 2.5% to 3.2%, and GDP will grow by an average of 3% annually over 2020-2022.
“Ukraine would have to attract more investment flows from abroad for a more meaningful and sustained pick-up in growth. In this context, the current government’s legislative efforts to effect land reform could lift growth over our current projections as could potential improvements in the business environment,” S&P said.
The analysts note investment is just 19% of 2018 GDP, down from the peak of 30% in 2007 prior to the global financial crisis. Another factor inhibiting economic growth is the weak banking sector lending. From 2014 to 2018, real credit growth to the private sector has contracted cumulatively by nearly 65%.
“While headline credit growth in 2017 and 2018 was positive, it was negative in real terms,” S&P said.
Risks to S&P growth projections include a slowdown in external demand for Ukraine’s key commodity exports and a flare-up of geopolitical tensions with Russia.
According to the projections, CPI (consumer price index) will fall from 11% last year to 8.8% this year, 7% next year, 6.5% in 2021 and 5.5% in 2022.
According to S&P analysts, the hryvnia exchange rate at the end of this year will be around UAH 27/$1, and in subsequent years it will gradually decrease and amount to UAH 27.50/$1 at the end of 2020, UAH 28/$1 at the end of 2021 and at the end of 2022 years – UAH 28.50 $1.
The current account deficit of the balance of payments after expanding this year to 2.8% of GDP in the next two years will expand to 3.2% of GDP, and in 2022 to 3.5% of GDP, S&P predicted.
The agency also expects a further gradual increase in reserves: from $20.33 billion last year to $21.49 billion this year, $22.18 billion next year, $22.95 billion in 2021 and $23.15 billion in 2022.
“While the immediacy of a fresh IMF program has receded, for instance compared to late last year, we would argue that such an arrangement serves to act as an important signal to investors while also facilitating access to funds from other IFIs [international financial institutions] at concessional rates. In this context, any backtracking on previously implemented reforms could potentially undermine Ukraine’s prospects in securing or maintaining on track any successive arrangement with the IMF. In the same vein, a settlement with the former owners of PrivatBank – which the state nationalized in 2016 at a cost of $5.5 billion (nearly 6% of 2016 GDP) – could potentially hurt relations with the IMF and other IFIs,” S&P said.
S&P projects general government debt to GDP will decline to below 50% in 2021 in both gross and net terms; S&P forecasts payouts from the government’s GDP warrants will be contained through 2022.
