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Ukraine Country Risk Report Q2 2016

  • March 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views Economic recovery in Ukraine will be sluggish in the years ahead. The country is stepping out of a prolonged period of economic contraction, having experienced two fully fledged economic crises in the last seven years. It is unlikely that the Ukrainian government will retake control of Crimea and Sevastopol, nor the occupied parts of the Donetsk and Luhansk regions. Ukraine will only meet part of the major structural reforms that are required by the IMF through its financing package. The Ukrainian authorities have already removed most of the gas subsidies and also implemented pension reforms. However, fighting endemic corruption, reforming the judiciary, and improving the banking sector and the business environment will take a slow pace. Despite the new IMF package, Ukraine’s FX reserves remain poor. FX reserve levels will also remain under pressure in the long term, as imports will outpace exports again in 2016 and beyond.

Russian President Vladimir Putin will be happy with Crimea for now, and will not push for annexation in the North East of Ukraine. Ethnic divisions in NE 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). Moreover, Russia’s shift of its attention to Syria will benefit Ukraine, whilst both Moscow and Kiev have urgent economic needs to end the fighting in eastern Ukraine. Major Forecast Change We have adjusted our inflation and current account forecasts, as the current political crisis will prevent to IMF from disbursing the third tranche of Ukraine’s Extended Fund Facility.

Table Of Contents

Ukraine Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Change5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Political Crisis Puts Pressure On Growth8
A further deterioration of the political crisis in Ukraine will drag on growth in the coming years
Economic Growth Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Monetary Policy 11
UAH Depreciation Putting Inflation Target Out Of Reach11
Inflation in Ukraine will continue to fall sharply in the coming months However, the decline will be less than the central bank anticipates
as the political crisis puts pressure on the currency
Monetary Policy Framework 12
TABLE: MONETARY POLICY12
Fiscal And Debt Outlook 13
Budget Deficit To Shrink13
Tax reforms in Ukraine will have a net positive effect on increasing government revenues in the years ahead
Structural Fiscal Position 14
TABLE: COMPARISON OF KEY TAX RATES14
TABLE: FISCAL POLICY15
External Trade And Investment Outlook 16
Structural Reform Needed To Prevent BoP Crisis16
Ukraine will face a renewed balance of payments crisis if the government turns out to be unable to push forward structural reforms
While dependency on Russia for gas imports is fading, import growth will outpace exports again over the coming years
Outlook On External Position 18
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE19
TABLE: TOP 5 GOODS IMPORTS IN 201419
TABLE: TOP 5 GOODS EXPORTS IN 201419
Currency Forecast 20
UAH: Capital Controls To Have Little Effect20
Ukraine's political crisis will be a strain on foreign currency reserves and in turn the hryvnia exchange rate in the coming months
Nevertheless, we do not believe that capital controls will be fully lifted in the next 24 months
TABLE: EXCHANGE RATE FORECASTS20
Chapter 2: 10-Year Forecast 23
The Ukrainian Economy To 2025 23
Colossal Structural Reform Needed To See Through The Decade23
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
TABLE: LONG-TERM MACROECONOMIC FORECASTS 23
Chapter 3: Political Outlook 27
SWOT Analysis 27
BMI Political Risk Index 27
Domestic Politics 28
Stalled Reforms To Have Large Implications28
The resignation of Ukraine's economy minister will not only put pressure on the government to deliver structural reforms, but will also
likely prevent the IMF from disbursing Ukraine with highly necessary financing in the coming months
TABLE: POLITICAL OVERVIEW 28
Long-Term Political Outlook 29
Eastern Separatism To Persist; Reforms To Face Bumpy Path29
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 4: Operational Risk 33
SWOT Analysis 33
Operational Risk Index 33
Operational Risk 34
TABLE: OPERATIONAL RISK34
Trade Procedures And Governance 35
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISK 35
TABLE: IMPORT AND EXPORT DOCUMENTS36
TABLE: TRADE PROCEDURES BREAKDOWN36
Vulnerability To Crime 37
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Tail Risks Mounting Amid Sub-Par Growth39
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%) 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %41
TABLE: MACROECONOMIC DATA and FORECASTS43

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