The World Bank, taking into account the results of H1 2019, has improved its forecast for gross domestic product (GDP) growth in Ukraine in 2019 from 2.7% to 3.4%, expecting that it would accelerate to 3.7% and 4.2% in 2020 and 2021 respectively.
“If the new government is able to deliver on its ambitious reform goals, growth can increase to 4% by 2021,” the World Bank said in its October report entitled “Migration and Brain Drain.”
The analysts said that this will require progress in the following areas: reviving sound bank lending to the enterprise sector by completing the reform of state-owned banks; attracting private investment into tradable sectors by establishing a transparent market for agricultural land, demonopolizing key sectors and strengthening antimonopoly policy and enforcement, privatizing state-owned enterprises, and tackling corruption; and safeguarding macroeconomic stability by addressing current expenditure pressures, securing adequate financing, further reducing inflation, and rebuilding international reserves.
If reforms do not progress and adequate financing is not mobilized, growth could fall below 2% as investor confidence deteriorates, macroeconomic vulnerabilities intensity, and financing difficulties force a compression in domestic demand. Ukraine will need to safeguard macroeconomic stability and manage fiscal risks.
According to the expectations of the World Bank, in 2019, the deficit of the national budget o Ukraine would be 2.2% of GDP. The figure would decrease to 2.1% of GDP in 2020 and to 1.9% of GDP in 2021.
According to the World Bank’s forecast, the public debt will also continue to decline this year to 53% of GDP, but will grow in 2020 and in 2021 to 54.6% of GDP and to 55.3% of GDP, respectively.
As indicated in the materials, the current account deficit will continue to grow: in 2019 – to 3.5% of GDP, in 2020 – to 3.8% of GDP and in 2021 – to 4.3% of GDP.
At the same time, the bank expects a slow increase in net foreign direct investment (FDI) inflows in 2019 and 2020 to 2.2% of GDP and 2.3% of GDP, respectively.
At the same time, inflation will take a downward trend: from 9.5% at the end of last year to 6.8% this year, as well as 6% and 5.4% in 2020 and 2021, respectively.
According to the report of the World Bank’s experts, the main risk for the Ukrainian economy is formidable financing needs. So, according to the analysts, it will take about $11 billion per year, or 8% of GDP, to pay off government debt and finance the budget deficit in the current and next two years.
“To raise the necessary financing, it is critical to maintain the reform momentum and fiscal discipline, while continuing cooperation with development partners,” the bank said in the report.
Ukraine’s GDP growth will reach 3.2% in 2020 with a further acceleration to 3.6% in 2021, Morgan Stanley predicts.
Since the prospect of land reform is becoming more defined, the bank is raising its forecast for the economic growth of Ukraine and the hryvnia exchange rate. Now it expects GDP growth by 3.2% in 2020 with a further acceleration to 3.6% of GDP in 2021. The bankers also forecast the hryvnia exchange rate of UAH 26.5/$1 at the end of 2019 and UAH 27.5/$1 by the end of 2020.
According to the report, Morgan Stanley also expects the first tranche from the International Monetary Fund for Ukraine before the end of this year, which could follow the adoption of the law on the national budget of Ukraine for 2020.
The Cabinet of Ministers sets a goal of raising $50 billion of investment for GDP growth of 40% in five years in the government program, Ukrainian Prime Minister Oleksiy Honcharuk has said.
“We confirm that over the next five years (and we consider this situation realistic and aiming high with this ambition) we will come to a situation when our economy will grow by 40%. To do this, we need to attract somewhere $50 billion of investment,” he said at a press briefing in Kyiv on Monday, talking about the government’s program.
As reported, the State Statistics Service in 2018 substantially revised foreign direct investment (FDI) indicators in Ukraine in the form of equity capital: if at December 31, 2017 they amounted to $39.14 billion, then at January 1, 2018 – $31.59 billion. According to the statistics, FDI growth for the first half of 2019 amounted to $0.84 billion, compared with $0.69 billion in 2018 and $0.38 billion in 2017, while before that, three years FDI were reduced – totally by $22.47 billion.
In addition, according to Honcharuk, the government sets itself the task of creating 1 million jobs.
“We must create such conditions so that it would be comfortable for people to start a business, their own business, so that foreign companies would be interested in entering the country,” the prime minister said.
The government said in the program, posted on the website of the Verkhovna Rada on Monday, that the government intends to distribute new budget revenues according to the 70/30 principle, “where 70% will be invested in economic development, 30% will be spent on social security.”
“To simplify the calculations, we proceed from the fact that 1% of inclusive economic growth gives us about UAH 15 billion of revenue to the national budget,” the government said in the document.
In the opening statement of the program, bringing of all the main roads into good condition (24,000 km), the active development of the railway and the construction of five deep-sea ports and 15 airports are listed among the main plans.
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.
The draft national budget of Ukraine for 2020 provides for the allocation of UAH 245 billion for national security and defense, which makes up 5.4% of the gross domestic product of Ukraine, Minister of Finance Oksana Markarova has said. “In our spending, we focus on national security and defense. In this budget, UAH 245 billion is allocated for national security and defense. This is 5.4% of GDP. Expenses are allocated based on 2019 expenditures,” Markarova said, presenting the draft national budget in the session hall of the Verkhovna Rada.
“Please note that there appeared a separate budget program, in which additional funds are foreseen for the National Security and Defense Council, which will be distributed by second reading,” she added.
The draft national budget for 2020 foresees UAH 245.8 billion for national security and defense, including UAH 207.8 billion in expenses under the budget programs of the Ministry of Defense, UAH 10 billion in state guarantees, UAH 28 billion in additional expenses from the general fund according to the budget program of the National Security and Defense Council (NSDC) “Unallocated expenses on national security and defense,” which will be distributed separately by the decision of the NSDC.
Real GDP in Ukraine in 2019 would grow by 3.2% under the influence of higher internal demand (both consumer and investment) than it had been projected, according to the updated Dragon Capital’s forecast. Earlier Dragon Capital assessed growth of the Ukrainian economy this year at 2.5%.
According to the forecast, the external environment in the first half of the year was better for Ukraine than expected, in particular, because of the sharp favorable change in prices for iron ore and gas.
Despite the fact that in the second half of the year, Dragon Capital expects deterioration in trade, the updated annualized forecasts are still better than they were.
The estimate of the increase in real GDP in 2020 remained the same – 2.8%, since the positive impact of higher demand will be offset by a reduction in the transit of Russian gas, Dragon Capital said in the document. Half a year ago, analysts at Dragon Capital were expecting a 20% drop in transit, but now they predict a 50% fall.
The authors of the report reminded that on January 1, 2020, the 10-year transit contract between Naftogaz Ukrainy and Russia’s Gazprom will expire. The latter is strenuously promoting the Nord Stream 2 and Turkish Stream, the alternative projects to the Ukrainian transit, while the trilateral meetings on the transit issue involving Ukraine, the European Union (EU) and Russia have so far been fruitless.
The analysts said that they revised their forecast on expectations that Ukraine will sign a new extended fund facility with the International Monetary Fund (IMF) in the fourth quarter of 2019 for $6-8 billion after the formation of a new government following the parliamentary elections to be held on July 21.
“Although the current government is successfully coping with growing payments on foreign debt, we still believe that the need for fiscal financing will remain high in the coming year, supporting Ukraine’s need to have a working program with the IMF,” the experts said.
In U.S. dollar terms, the nominal GDP forecast for the current year has been improved from $143 billion to $150 billion, for 2020 – from $148 billion to $161 billion.
Taking into account the unexpectedly strong dynamics of January-May 2019, the analysts at Dragon Capital also significantly improved the forecast for the current account deficit – by 1 percentage point (p.p.), to 2.7% of GDP ($4 billion), explaining this by slower repatriation of dividends and such an improvement in terms of trade, which compensates for the increase in consumer and investment imports.
According to the updated macroeconomic forecast, the current account deficit in 2020 will increase to 3.2% of GDP ($5.1 billion) due to less favorable terms of trade and reduction in gas transit, which, however, is noticeably better than the previous estimate of 3.9%.
As for the hryvnia exchange rate, the investment company experts point to the absence of risks associated with fundamental factors. According to their estimates, the exchange rate will increasingly depend on the mood. In particular, they noted a sharp increase in the inflow of nonresidents (a rise of $1.8 billion) in the first half of 2019. The Dragon Capital analysts said that a further inflow of foreign investors will support the hryvnia in the second half of 2019, reducing the influence of the seasonality factor.
In the updated forecast, the hryvnia rate at the end of 2019 has been improved to UAH 27.50/$1 from UAH 29.70/$ 1 (a rise of 0.7% year-over-year), and at the end of 2020 – UAH 28.50/$1 from UAH 31/$1. The expected weakening next year Dragon Capital explains, first of all, by a decrease in gas transit income and a smaller inflow of foreign investment in hryvnia-pegged government securities.
As for inflation, its forecast for this year is worsened from 7.3% to 7.8% compared with 6.3%, so far expected by the National Bank. However, in 2020, as expected in Dragon Capital, inflation will drop to 6%, which is better than the company’s previous forecast of 6.2%.
The analysts said that the National Bank will resume the easing policy and will lower the key policy rate by 150 basis points this year and 500 basis points in 2020, to a total of up to 11.0% per annum.
Dragon Capital said that the main risk for the forecast is the absence or longer delay of the IMF program, on the other hand, pointing to additional growth potential in the event of a possible acceleration of structural reforms.
According to the analysts of the company, relations with Russia are still an important factor in influencing the macroeconomic situation in Ukraine, as well as the country’s dependence on global commodity prices and the situation in the international loan market.
