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21 August 2017
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Ukraine economy in 2017: more growth, less inflation

The economy of Ukraine, which is gradually getting out of the protracted crisis, in the coming year will show a steady growth amid inflation reduction. Ukraine’s leading analysts interviewed by UNIAN say that strengthening the fight against corruption and attracting investment are the key factors for boosting the economy. Here is the macroeconomic consensus forecast for 2017.

Ukraine's economy in 2017 will show a steady growth / freeimages.com
Ukraine's economy in 2017 will show a steady growth / freeimages.com

According to the forecast of analysts polled by UNIAN, Ukraine's economy in 2017 will continue the trend of recovery after a positive turning point in 2016, which resulted in the growth of the gross domestic product of about 1.5%. The leading Ukrainian economists expect that in the coming year, GDP growth may accelerate to 2.1%, industrial output will grow by 2.5%, while inflation will slow down from 12-13% in 2016 to 10%.

The experts predict growth in 2017 of Ukraine’s  international reserves from $15.5 billion as of the end of 2016 to $17.3 billion. At the same time the average annual hryvnia exchange rate, should not go beyond the range of UAH 27-30 to the dollar, according to analysts.

This means that in the new year, Ukraine, which is in the process of reforming and refuting the external aggression, will show no explosive growth, but the pace of recovery will accelerate. And this inspires moderate optimism.

The key results of the past year, which laid the base and formed the major trends of 2017, were the achievement of macroeconomic stabilization and the beginning of a slow economic recovery. Throughout the year, the systemic risks for the Ukrainian financial sector have dropped, while macroeconomic environment, both external and internal, was favorable enough.

After a protracted economic downturn, Ukraine’s economy showed signs of recovery in many areas: GDP growth renewed, inflation was under control and stayed within the boundaries of the target value of the National Bank, making bank deposits once again appealing to the public, while the losses of the banking and corporate sectors declined.

According to official data, in the third quarter of 2016 Ukraine's real GDP grew by more than expected - by 2% against the forecast of 1.6%, due to growth in investment, which was the key factor for the economic recovery. Production volumes in key industries ceased to fall, starting to recover, primarily due to industry, agriculture, and metallurgy.

According to statistical data, over the 10 months of 2016, the Ukrainian economy received $3.1 billion in foreign direct investment, which is 41% more than in 2015, of which $2.2 billion came as a result of recapitalization of banks by their shareholders.

To attract investment and stimulate business, the National Bank in 2016 continued to actively curtail foreign exchange restrictions introduced in 2014 and ease its monetary policy. These steps were made possible due to the stabilization of the hryvnia. This year the national currency fell from UAH 23.4 to the dollar to UAH 26.3 to the dollar, but the currency jumps did not cause panic among the population, Ukrainians actually sold more foreign currency than they bought. In critical situations, the NBU came out on the interbank market with interventions and did not let the rate go down below the acceptable level.

However, for Ukrainian citizens to feel any tangible improvement in living standards, a higher pace of economic growth is required, hence more reforms and a more effective fight against corruption. Ukraine's GDP in 2014-2015 against the backdrop of the war waged by Russia in Donbas and the occupation of Crimea fell by 17.5%. Even with the 3-4% pace of economic growth, the recovery to pre-crisis levels of 2013 will take four to five years.

"Without a progress in issues of combatting corruption and the return of confidence in the judiciary, so important for the investors, achieving acceleration of growth to 5-8% per year is impossible. And without it, even the recovery to the 2013 level will take many years. It poses a threat of political instability and migration of Ukraine's human and financial capital," said Hlib Vyshlinskiy, the executive director of the Center for Economic Strategy.

According to him, despite the fact that Ukraine has managed to achieve macroeconomic stabilization, the critical mass of positive changes required has not been reached yet.

Meanwhile, a full-fledged economic recovery is constrained by high bank lending rates, weak income growth, and low domestic demand, as well as some foreign exchange restrictions of the NBU. Corruption has not been rooted out in state agencies, especially, in the State Fiscal Service, while Ukraine’s judicial system, which is now being reformed, has not yet undergone complete purification.

"Today we are seeing that Ukraine's economy starts to revive, but we need to increase the pace of growth. We need to move much faster than anyone in our place, we have no time," said Prime Minister Volodymyr Groysman.

Groysman: We need to move much faster ... we have no time / Photo from UNIAN
Groysman: We need to move much faster ... we have no time / Photo from UNIAN

The government forecasts GDP will grow by 3% in 2017. International financial institutions are more conservative in their estimates. According to the IMF and Fitch Ratings, the growth of the national economy in 2017 will be at 2.5%. The World Bank and the EBRD believe that the growth of the Ukrainian economy will not exceed 2%.

Expert forecasts

The experts polled by UNIAN assess positively the results of 2016, but they believe that in the next year, Ukraine has a lot to do to accelerate the pace of economic recovery. The conclusion of UNIAN’s consensus forecast is that Ukraine's economy in 2017 will grow by 2.1%.

Most experts believe that the economic growth next year will be based on the improvement of the external environment and the low comparative base. Analysts unanimously refer to the possible growth as “recovery growth”, while for a real economic revival the country will need investments, and they are impossible without a judicial reform, successful privatization, and strengthening the protection of investors' rights. Thus, the prospects of Ukraine’s economy for the next year will continue to be largely determined by political factors rather than by economic conditions.

Macroeconomic forecasts for 2017:

* Forecast calculation was carried out with the use of a median to neutralize the influence of the values strongly deviating from the average.
* Forecast calculation was carried out with the use of a median to neutralize the influence of the values strongly deviating from the average.

Head of Analytical Department at Concorde Capital investment company Oleksandr Parashchiy:

"For the economy to "take off", it needs investment, while investment needs successfully completed reform as well as exemplary privatization. We are seeing neither of these things now. There is a problem with the protection of investors' rights. Therefore, there is no investment. And because today there is no investment, then tomorrow we will see no rapid growth. If this continues, the recovery growth will be exhausted, and we will move into a stage of stagnation. Much has been done. But this is all, by and large, just stabilization measures. Roughly speaking, this has been done not to die. But nothing really has been done to develop. There was the police reform, there was a successful stage of decentralization, and the reform of public procurement. But this is obviously not enough to open up opportunities for our economy. There has been no civil service reform, we also need judicial reform, the reform of the prosecutor's office, and we need a land market."

The expert believes that the GDP growth in 2017 will not overcome the mark of 2.1%, while the industrial output will grow by 1.8% and inflation will slow down to 8.9%.

Chief analyst at Ukrsotsbank Andriy Prykhodko:

"Assessing 2016, we can say that the main achievement is the stabilization of the macroeconomic situation and, above all, the stabilization of the hryvnia exchange rate and inflation. In addition, such factors played in Ukraine’s favor as the low cost of servicing the external debt in the first year after the restructuring, low energy prices, the growth of the crop of grains and oilseeds. In 2017, it is very important for Ukraine to continue cooperation with the IMF and other official creditors. Even more so, considering that the chances to enter foreign capital markets in 2017 are not very big, and in case cooperation with the IMF is suspended, the chances are close to zero."

The expert believes that the Ukrainian economy in 2017 will show growth of 2%, industrial output will be increased by 2.5%, while inflation will be at 11%. At the same time, he is quite pessimistic about the trade balance. Prykhodko expects export growth next year due to higher metal prices and positive dynamics of agriexports. But, in his opinion, even a moderate increase in domestic consumption will cause an increase in imports of consumer goods, while the rise in oil prices will increase the demand for foreign currency among importers of energy sources.

Head of research department at ICU Group Oleksandr Valchyshen:

"The internal political crisis and the resulting consequences will be the main risks to the economy in 2017. However, investors will begin to invest in Ukraine and especially it will be an investment in fixed capital. "

According to the expert, the main driver of the economy in 2017 will be the growth of domestic demand, which will be provided by maintaining the share of public expenditure at the level of 30% in relation to GDP and the growth of investment in fixed assets.

"The increase in government spending through the budget is a key element of support for domestic demand in the economy. Export-oriented sector in the current environment cannot yet be an accelerator of economic recovery, therefore the government is taking measures to increase domestic demand, including consumption, which today accounts for 68% of GDP," said Valchyshen.

"Domestic demand will be provided by the domestic supply of goods or services. In addition, we should expect recovery in consumer capability of households. This is good news for the construction business, engineering industry and their adjacent segments," he added.

According to Valchyshen, economic growth in 2017 may reach 2.3%, the industrial output will show growth of 3% compared to 2016, and the average inflation will not fall below a 10% mark.

Chief economist at Alfa-Bank Oleksiy Blinov:

"We expect a moderate economic growth of 2.7%. After a significant decline in 2014-2015, it will not be a recovery growth, but rather a "stagnation with a plus sign." At the beginning of the year, inflation trends will be strong enough, caused by among other things by the increasing business costs. We expect that by the end of the first quarter of 2017, the annual inflation rate will exceed 15% (compared to 12.1% in November 2016). Subsequently, inflation will gradually slow down. The main risk to the economy in 2017 is reform halt and the victory of populism in economic policy. In this case, Ukraine will be unable to attract capital from abroad, which will bring to life inflation and foreign currency risks."

Executive Director at SigmaBleyzer Oleh Ustenko:

"Ukraine's economy is starting to show growth. But it is very small, at 1%, and it is absolutely clear that it does not satisfy the country, which fell by 17.5% over 2014 and 2015. The country’s ratings have improved as S&P and Fitch have raised them, but at the same time, we must understand that these ratings are still below the investment grade. To change this situation, structural reforms should be carried out. Without them, we are doomed to low ratings and extremely low inflows of foreign direct investment."

Thus, the economic growth in 2017 will be entirely dependent on investment and exports, as domestic demand due to the tight monetary policy of the National Bank and weak lending will be recovering at a slow pace. At the same time, macroeconomic stability will continue to depend on the continuation of cooperation with the IMF and other international donors. In the following year, the country will have to make significant payments on its public debt, and Ukraine will not be able to deal with it without the support of its creditors. The actions of the Government and the Verkhovna Rada next year should finally be directed at carrying out much-needed reforms, without which the country will never see the long-awaited investments.

Ksenia Obukhovska (UNIAN)

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