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Ukraine Business Forecast Report Q2 2014

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

Core Views

The new government of Ukraine to be composed of pro-Western officials. 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. An emergency financing package without conditions may be provided in order to prevent default in 2014. R ussia will not relinquish Crimea, although whether part of a semiindependent state (eg Transnistria, Abkhazia etc.), or more formally part of Russian Federation is hard to call.

To limit fallout with the West we think the former, but the recent vote by Crimean parliament to join Russia may push their 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. R ussia’s Vladimir Putin will be happy with Crimea for now, and will not push military intervention into north east of Ukraine. Ethnic divisions in north-east Ukraine not nearly 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

W e have downgraded our outlook for real GDP growth for 2014, and now expect GDP to contract by 1.9% in 2014. This change reflects our expectations for hryvnia devaluation and concomitant impact on household purchasing power, the Crimean conflict dampening fixed investment and expectations of a retrenchment in government spending.

Key Risks To Outlook

A sharper than expected devaluation could trigger major shockwaves through the domestic economy, particularly within the financial sector which has barely recovered from the 2008 devaluation. Existing capital buffers may prove insufficient to deal with a devaluation of 30% magnitude or greater.
W e see huge challenges surrounding the ability of the interim government to pass the unpopular reforms required to gain access to a full IMF/EU funding package. Removing gas subsidies, for example, could inflame tensions within the eastern regions. Further unrest in the eastern regions of Ukraine could spur military intervention by Russia on the pretext of protecting the Russian population present there. The threat of a protracted military conflict would likely accelerate capital flight, placing the unit under intense pressure.

Even excluding the prospect of a protracted military intervention from Russia for the moment, the country is at severe risk of an uncontrolled devaluation of the hryvnia and consequent economic collapse. A devaluation to UAH11.0-12.0/US$ for any extended period would place severe pressure on households who would see their savings and purchasing power sharply reduced overnight, thus dampening already slowing retail sales and pushing up inflation. The government itself would also suffer due to additional debt servicing costs on its US$27bn external debt burden, while the banking sector would likely experience a sharp deterioration in asset quality on its FX loan books.

Table Of Contents

Ukraine Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Next Steps To Restore Stability 8
The political vacuum left by the ousting of former president Viktor Yanukovych has created a power vacuum that is exacerbating
Ukraine's dire economic situation. Here we outline a number of potential successors and the steps we think are necessary to avoid
economic collapse.
TEABLE: Political Ove rvie w Table 8
Long-Term Political Outlook 10
A More Dangerous And Uncertain Future 10
The very survival of the Ukrainian state in its present form is in question. Whichever party comes to power in Kiev will struggle to govern
the country, which could yet face greater separatist pressures over the coming years.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Devaluation To Keep Economy In Recession 14
The macroeconomic outlook has worsened considerably, and the economy is close to a balance of payments crisis unless it receives
external financing over the coming quarters. International reserves have dropped to dangerously low levels, prompting the National
Bank of Ukraine (NBU) to cease intervening in the exchange rate, instead using capital controls to try and stem pressure.
Balance Of Payments 15
Close To Crisis 15
The economy continues to hurtle towards a balance of payments crisis, and the recent escalation of tensions with Russia has increased
the pressure on Ukraine's external accounts, with gas discounts likely to end in Q214 . Despite new capital controls, domestic dollar
accumulation and capital flight continues to erode the country's limited international reserves, and Ukraine will default on its external
obligations in 2014 without a financing package.
Fiscal Policy 18
In Urgent Need Of External Financial Aid 18
Ukraine is on the brink of a major credit event and urgently requires external assistance in order for the government to meet its financial
commitments. While we expect the West may provide a small interim loan to allow the country to avoid defaulting on its repayments
in April and June, larger financing packages will be on a conditional basis, and we see risks that the government will be unable to
implement the associated reforms. The recent devaluation of the hryvnia has also substantially worsened the sovereign credit profile.
Exchange Rate Forecast 19
UAH: Government Struggling To Maintain Control 19
Chapter 3: 10-Year Forecast 23
Ukraine's 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 Macroeconomic Forecasts 23
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions 29
Infrastructure 31
Market Orientation 33
Chapter 5: Key Sectors 35
Autos 35
Table : Vehicle Producti on, 2011-2017 35
Table : Vehicle Sales , 2011-2017 36
Food and Drink 38
Table: Food Consumption Indicators - Historical Data and Forecasts, 2010-2017 39
Table : Alc oholic Drinks Volume /Value Sales - Hist orical Data and Forecasts , 2010-2017 41
Table: Mass Grocery Retail Sales By Format - Historical Data and Forecasts, 2010-2017 42
Other Key Sectors 43
Table : Oil and Gas Sect or Key Indicat ors 43
Table : Pha rma Sect or Key Indicat ors 43
Table : Inf rast ructu re Sect or Key Indicat ors 43
Table : Telec oms Sect or Key Indicat ors 44
Table : Defence and Secu rity Sect or Key Indicat ors 44
Table : Freight Key Indicat ors 44
Chapter 6: BMI Global Assumptions 45
Global Outlook 45
Global Growth OptimismTurning To Disappointment 45
Table: Global Assumptions 45
Table : Devel oped States , Real GDP GrowtH, % 46
Table : Eme rging Markets , Real GDP Growth , % 47

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