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Ukraine Business Forecast Report Q4 2014

  • September 2014
  • -
  • Business Monitor International
  • -
  • 46 pages

Core Views
Ukraine’s economy is heading for a major recession which it is unlikely to emerge from until 2016. Ongoing fighting between the Ukrainian army and pro-Russia forces in the east, and the persistent threat of a military invasion by Russia, creates huge challenges to forecasting the economic outlook over the coming quarters with any meaningful degree of confidence. EU/IMF financing package will require reforms, including: FX liberalisation (although this is likely to be implemented in stages), partial removal of gas subsidies and potentially pension reform.

Despite the new IMF package, Ukraine’s fiscal position remains poor and is likely to deteriorate over coming quarters. FX shocks, extended fighting and the growing risk of a banking sector bailout all pose significant challenges to the sovereign debt profile. Ultimately, we believe Ukraine’s debt load is likely to become unsustainable, necessitating a debt restructuring further down the line. Putin will be happy with Crimea for now and will not push military intervention into North East of Ukraine. Ethnic divisions in NE Ukraine not as clear cut as 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 real GDP growth forecasts to -8.1% and -3.4% in 2014 and 2015, from -4.1 and 1.1% previously due to extended fighting in eastern Ukraine, which has damaged industrial output. The weaker hryvnia has also had a concomitant impact on household purchasing power and further tranches of IMF support remain contingent on a retrenchment in government spending. We have increased our inflation forecast for 2014 to average 16%, falling to 12% in 2015 due to pass-through effects from the exchange rate.

Table Of Contents

Ukraine Business Forecast Report Q4 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
Kiev-Moscow Talks Signal End-game In Sight8
The first direct talks between Moscow and Kiev represent a significant step towards the resolution of the crisis, but this will remain a
protracted and difficult process. A conclusive resolution will not materialise within the next few months.
Table: Political Overview..8
Long-Term Political Outlook 9
Eastern Separatism To Persist, While Myriad Other Risks Loom..9
Ukraine will emerge weaker from the 2014 conflict, losing de facto control of the separatist East to pro-Moscow forces. Even without
the conflict, President Petro Poroshenko faces colossal challenges in averting economic crisis, tackling corruption and reforming the
economy.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings... 13
Economic Activity... 14
On The Brink Of Economic Collapse..14
Ukraine is on the verge of economic collapse, and even in the best case scenario, will remain in deep recession across 2014 and
2015. Fighting in eastern Ukraine has caused damage to production facilities and infrastructure that the economy will take many years
to recover from. Without further capital injections from the IMF over the coming quarters, the economy faces complete economic
collapse.
Tab le: Economic Acti vit y..14
Balance Of Payments . 16
Reforms Needed To Restore Sustainability...16
Ukraine is currently in the midst of a major balance of payment correction. While the collapse in the hryvnia has driven a major
adjustment in the country's external accounts, the government will need to follow through with sizeable structural reforms in order to
place Ukraine's external accounts on a sustainable long-term trajectory.
Table: Current Account...17
Fiscal Policy. 18
Debt Restructuring Looking Increasingly Unavoidable.18
Despite the new IMF package, Ukraine's fiscal position remains poor and is likely to deteriorate over the coming quarters. FX shocks,
extended fighting and the growing risk of a banking sector bailout all pose significant challenges to the sovereign debt profile. Ultimately,
we believe that Ukraine's debt load is likely to become unsustainable, necessitating a debt restructuring further down the line.
Table: Fiscal Policy18
Exchange Rate Policy 20
UAH: Time Running Out To Secure Stability.20
With capital controls keeping the Ukrainian hryvnia relatively insulated from all but the strongest geopolitical driven shocks, the unit
should continue to trade within the UAH12-13/USD range over the next six months. While our forecasts imply a gradual consolidation
around these levels, without a permanent ceasefire and the disbursement of the remaining tranches of IMF funds over the next six
months or so, currency stability cannot be assured beyond this period.
Table: UAH Currency Forecasts...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 ten 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.
Tab le: Long-Term Mac roec onomic Forecasts 23
Chapter 4: Business Environment. 27
SWOT Analysis 27
BMI Business Environment Risk Ratings.. 27
Business Environment Outlook. 28
Introduction...28
Institutions... 28
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS28
TABLE: BMI LEGAL FRAMEWOR K RATING.29
Infrastructure .. 30
TABLE: LABOUR FORCE QUALITY..30
TABLE: EMERGING EURO PE - ANN UAL FDI INFLO WS.31
TABLE: TRADE AND INV ESTMENT RATINGS.32
Market Orientation... 33
Chapter 5: Key Sectors.. 35
Telecommunications... 35
Tab le: Telec oms Sect or - Mobi le - Hist orica l Data and Forecasts 36
Tab le: Telec oms Sect or - Wireline - Hist orica l Data and Forecasts 37
Shipping... 38
Tab le: Major Ports Data ...42
Other Key Sectors... 45
Tab le: Oi l and Gas Sect or Key Indicat ors.45
Tab le: Pha rma Sect or Key Indicat ors45
Tab le: Defe nce and Secu rit y Sect or Key Indicat ors45
Tab le: Infrast ructu re Sect or Key Indicat ors...46
Tab le: Food and Drink Sect or Key Indicat ors.46
Tab le: Aut os Sect or Key Indicat ors...46
Tab le: Freight Key Indicat ors46
Chapter 6: BMI Global Assumptions. 47
Global Outlook. 47
Eurozone Downgrade On Poor Q214..47
Tab le: Globa l Assumpti ons.47
Table: Developed States, Real GDP GrowtH, %...48
Tab le: BMI VERSUS BLO MBERG CON SENSUS REAL GDP GRO WTH FOR ECASTS, %. 48
Tab le: Eme rgi ng Markets , Rea l GDP Growth , %..49

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