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Ukraine Country Risk Report Q1 2016

  • December 2015
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views

Economic recovery in Ukraine will be sluggish in the years ahead.The country is stepping out of a prolonged period of economiccontraction, having experienced two fully-fledged economic crisesin the last seven years.It is unlikely that the Ukrainian government will retake control ofCrimea and Sevastopol, nor the occupied parts of the Donetsk andLuhansk regions.Ukraine will only meet part of the major structural reforms that arerequired by the IMF through its financing package. The Ukrainianauthorities have already removed most of the gas subsidies and alsoimplemented pension reforms. However, fighting endemic corruption,reforming the judiciary and improving the banking sector andthe business environment will occur at a slow pace.Despite the new IMF package, Ukraine's foreign exchange (FX)reserves remain poor. FX reserve levels will also remain underpressure in the long term, as imports will outpace exports again in2016 and beyond.Russian President Vladimir Putin will be happy with Crimea fornow and will not push for annexation in the north east of Ukraine.Ethnic divisions in north-east Ukraine are not nearly as clear-cut asCrimea, and it would benefit Putin to retain a large ethnic Russianinfluence in mainland Ukraine (enabling him to maintain a directpolitical stake in Ukrainian affairs).

Moreover, Russia's shift of itsattention to Syria will benefit Ukraine, while both Moscow and Kievhave urgent economic needs to end the fighting in eastern Ukraine.Major Forecast ChangesWe have adjusted our current account forecasts, as we expect thecurrent account deficit to increase more rapidly in the coming years.

Table Of Contents

Ukraine Country Risk Report Q1 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
Election Results To Stall Reform Programme8
The results of Ukraine's local elections, held October 25, will further impede the Poroshenko government from adhering to its economic
reform programme, which is under the guidance of the IMF
TABLE: POLITICAL OVERVIEW 8
Regional Political Outlook 9
Russia-Ukraine Conflict: Cautious Optimism, But Hurdles Remain9
Renewed diplomatic efforts to implement the Minsk II ceasefire in eastern Ukraine have a realistic chance of success, especially
as fighting will wind down as winter sets in However, there are still many obstacles, and EU sanctions against Russia could still be
extended in January 2016
Long-Term Political Outlook 10
Eastern Separatism To Persist; Reforms To Face Bumpy Path10
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 Index 13
Economic Growth Outlook 14
Sluggish Recovery, Yet Some Room For Optimism14
While Ukraine's economy remains extremely weak, we are cautiously optimistic that the country's long-term outlook will improve IMF
conditionality will help Ukraine implement badly needed structural reforms and is likely to gradually aid the fight against corruption
GDP By Expenditure Outlook 15
TABLE: GDP GROWTH FORECASTS15
TABLE: PRIVATE CONSUMPTION FORECASTS15
TABLE: GOVERNMENT CONSUMPTION FORECASTS15
TABLE: FIXED INVESTMENT FORECASTS16
TABLE: NET EXPORTS FORECASTS16
Monetary Policy 17
Inflation-Targeting Regime Bringing Down Price Growth17
Inflation in Ukraine will continue to fall sharply in the coming years as base effects wear off from the 2014 hryvnia devaluation However,
a bad harvest in Q215 and Q315 will keep inflation at slightly higher levels than the National Bank of Ukraine expects Declining inflation
will allow the authorities to lower the policy rate, but this alone is unlikely to have much impact in controlling inflation or stabilising the
exchange rate
Monetary Policy Framework 17
TABLE: MONETARY POLICY 17
Fiscal Policy And Public Debt Outlook 19
Debt Burden To Overshadow Measures For Fiscal Consolidation 19
Ukraine's fiscal deficit will narrow as the government stays on track with its reform programme in the years ahead However, structural
inefficiencies will limit the effect of these reforms, while Ukraine's debt burden will continue to pose a systemic risk to financial stability
TABLE: FISCAL POLICY19
Structural Fiscal Position20
External Trade And Investment Outlook 22
Widening Current Account Deficit Keeps Pressure On External Financing22
Ukraine's current account deficit will widen again in 2016 and beyond, as the recovery in exports will be negligible While gas imports continue to fall, growth in overall imports will put pressure on the low levels of foreign exchange reserves, keeping the country heavily reliant on the IMF for its external financing needs
Outlook On External Position23
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE24
TABLE: TOP 5 GOODS IMPORTS IN 201424
TABLE: TOP 5 GOODS EXPORTS IN 201425
Currency Forecast25
Effectiveness Of Capital Controls Dependent On Structural Reforms25
Most capital controls will remain in place over 2016 This, in combination with IMF support, will keep the exchange rate at stable levels in the months ahead
TABLE: EXCHANGE RATE FORECASTS26
Chapter 3: 10-Year Forecast29
The Ukrainian Economy To 202429
Significant Reforms Needed To Realise Untapped Potential29
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 continuous institutional and economic reform, Ukraine's current economic growth model will prove unsustainable over the coming decade
TABLE: LONG-TERM MACROECONOMIC FORECASTS29
Chapter 4: Operational Risk33
SWOT Analysis33
Operational Risk Index33
Operational Risk34
TABLE: OPERATIONAL RISK34
Education 35
TABLE: EMERGING EUROPE - EDUCATION RISK36
TABLE: GRADUATES OF TERTIARY EDUCATION, 2008-201239
Government Intervention 40
TABLE: EMERGING EUROPE - GOVERNMENT INTERVENTION RISK41
Chapter 5: BMI Global Macro Outlook47
Global Outlook47
Emerging Markets Bending, Not Breaking47
TABLE: GLOBAL ASSUMPTIONS47
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %48
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %48
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %49

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