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Ukraine Business Forecast Report Q3 2014

  • June 2014
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

A EU/IMF financing package will require reforms, including foreign exchange liberalisation (although this is likely to be implemented in stages), partial removal of gas subsidies and potentially pension reform. An emergency financing package without conditions may be provided in order to prevent default in 2014. Russia will not relinquish Crimea, although whether it becomes part of a semi-independent state (eg Transnistria, Abkhazia etc), or more formally part of the Russian Federation is hard to call. To limit fallout with the West, we think the former is most likely, but a recent vote by the Crimean parliament to join Russia may push its hand. We see political risks as likely to threaten growth over the next 12 months as the government is forced to decide over closer relations with the EU or Russia. President Vladimir Putin will be happy with Crimea for now and will not push military intervention into north-east Ukraine. Ethnic divisions in northeast Ukraine are not nearly as clear-cut as in Crimea, and it would benefit Putin to retain a large ethnic Russian influence in mainland Ukraine (enabling him to maintain a direct political stake in Ukrainian affairs).


Major Forecast Changes

We have downgraded our outlook for real GDP growth for 2014, and now expect GDP to contract by 4.1% in 2014. This change reflects our expectations for hryvnia devaluation and the concomitant impact on household purchasing power, the Crimean conflict dampening fixed investment, and expectations of a retrenchment in government spending.

Table Of Contents

Ukraine Business Forecast Report Q3 2014
Executive Summary. 5
Core Views..5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook. 7
SWOT Analysis.. 7
BMI Political Risk Ratings 7
Domestic Politics . 8
Poroshenko Victory Could Mark Ukraine's Turning Point..8
The landslide victory for Petro Poroshenko in the first round of Ukraine's presidential elections held on May 25 marks the best-case
scenario for the country, despite disruption to voting in several areas in Eastern Ukraine. Nonetheless, considerable economic and
political challenges must be addressed over the coming months.
Table: Political Overview..8
Long-Term Political Outlook 9
A More Dangerous And Uncertain Future9
The very survival of the Ukrainian state in its present form is in question. President Petro Poroshenko will struggle to govern the country,
which could yet face greater separatist pressure over the coming years.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Deep Recession In 2014..14
We forecast Ukraine to experience a sharp recession in 2014, driven by the devaluation of the hryvnia and major trade disruption due to
the elevated risk of a military escalation with Russia. Soaring inflation, substantially tighter government spending, diminished purchasing
power and extremely tight credit conditions will also contribute to the dismal economic outlook.
Table: Economic Acti vit y..14
Balance Of Payments . 16
Devaluation To Drive Major Narrowing Of Current Account Deficit.16
The collapse of the hryvnia is driving a major balance of payments correction in Ukraine, and we forecast the current account deficit
to arrive at just 1.5% of GDP in 2014, from 7.1% in 2013. The collapse of the hryvnia has substantially eroded household purchasing
power, which will reduce consumer imports. Additionally, the threat of military escalation has led to disruptions in trade credit and
insurance underwriting, and consequently major falls in trade flows. However, we expect the current account deficit to widen slightly in
2015 owing to a normalisation of trade flows and a slight strengthening of the hryvnia.
table: Current Account...16
Fiscal Policy. 18
Considerable Financing Challenges Ahead..18
While the establishment of a new Stand-By Arrangement with the IMF will help to reduce the risk of a credit event over H214, the
devaluation of the hryvnia has weakened Ukraine's sovereign credit profile.
Table: Fiscal Policy18
Exchange Rate Policy. 19
UAH: Bulk Of Adjustment Now Over..19
Table: Ukraine Currency Forecast.20
Chapter 3: 10-Year Forecast... 23
The Ukrainian Economy To 2023... 23
Colossal Structural Reform Needed To See Through The Decade..23
Having failed thus far to break free from its dependence on cheap energy and a low-value-added export base, Ukraine has arguably
squandered the economic windfall experienced over the last 10 years. While there is still enormous unrealised potential in terms of
political reform and economic catch-up, without institutional and economic reform, Ukraine's current economic growth model will prove
unsustainable over the coming decade.
Table: Long -Term Macr oec onomic Forec asts 23
Chapter 4: Business Environment. 27
SWOT Analysis 27
BMI Business Environment Risk Ratings.. 27
Business Environment Outlook. 28
Institutions... 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS28
TABLE: BMI LEGAL FRAMEWORK RATING.29
Infrastructure .. 30
TABLE: LABOUR FORCE QUALITY..30
TABLE: EMERGING EUROPE - ANNUAL FDI INFLO WS.31
TABLE: TRADE AND INVESTMENT RATINGS.32
Market Orientation... 33
Chapter 5: Key Sectors.. 35
Pharmaceuticals and Healthcare... 35
Table: Pharm aceutic al Sales , Hist oric al Data and Forec asts ..36
Table: Healthc are Expenditure Trends , Hist oric al Data and Forec asts . 37
Defence and Security.. 38
Table: Defence Expenditure, 2010-2017 ...39
Other Key Sectors... 43
Table: Oi l and Gas Sect or Key Indic ators ..43
Table: Telec oms Sect or Key Indic ators 43
Table: Infrastructure Sector Key Indicators...43
TaBLE: Food and Drink Sect or Key Indic ators ..44
tABLE: Autos Sector Key Indicators...44
Table: Freight Key Indicators44
Chapter 6: BMI Global Assumptions. 45
Global Outlook. 45
Emerging Market Deceleration45
Table: Global Assumpti ons .45
Table: Developed States, Real GDP GrowtH, %...46
Table: BMI VERSUS BLOO MBERG CONSENSUS REAL GDP GROWTH FORECASTS, %. 46
Table: Emerging Markets , Real GDP Growth , %..47

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