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.