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Ukraine's economy-2018: faster growth amid higher inflation

20:30, 02 January 2018
7 min. 6985

In 2018, the Ukrainian economy will see growth for the third consecutive year after the fall in 2014-2015. A number of leading experts polled by UNIAN say they expect that positive dynamics will be achieved in all major macroeconomic indicators, while the key factors in accelerating growth will be strengthening of the fight against corruption and attracting investment. Here is a macroeconomic consensus forecast for 2018.

According to forecasts by leading economic analysts surveyed by UNIAN, Ukraine’s economy in 2018 will continue its recovery after a deep fall in 2014-2015, and even accelerate its growth to 3% compared with 2016 and 2017, when GDP grew by 2.3% and about 2%, respectively.

Ukrainian economists expect that in 2018, industrial production will grow by 3.3%, while inflation will slow to 11.5% from 13-14% in 2017. Experts predict the growth in 2018 of the country's gold and foreign currency reserves to $20.7 billion from $19 billion at the end of 2017. At the same time, the average annual exchange rate of the hryvnia should not exceed the range of UAH 27-30 to the U.S. dollar, the analysts say.

Forecasts drawn by experts show that, despite a higher pace of recovery this year, Ukraine, most likely, will not achieve a real boost in its economic recovery. Nevertheless, in the conditions of the pre-election season of 2018 and a slower pace of unpopular economic reforms, a 3% growth is a move forward.

Reforms and changes that were introduced in 2017 reduced the pressure of some acute problems on the country’s economy. Among the important decisions taken is the automated compensation of VAT, which led to the elimination of corruption schemes in the area and problems of business with the reimbursement.

The doubling of the minimum wage in 2017 made it possible to raise consumer demand, increase the income of the Pension Fund by raising the base for accrual of the unified social tax, and pull out from the shadows about one-tenth of all Ukrainian enterprises.

Pension reform, supported by the Verkhovna Rada, allowed raising pensions to 5.6 million pensioners and introduced a new indicator of the minimum insurance period for retirement and the dependence of the level of pensions on seniority, which in the future will reduce the burden on the state budget.

The banking sector in 2017 was able to record profit after a global purge of the system conducted by the National Bank in 2014-2016, rates on bank loans and deposits began to decline, and the liquidity of the system began to grow, creating a base for credit recovery.

Nevertheless, not all the indicators targeted for 2017 have been achieved. Inflation at the end of the year significantly deviated from the 8% target benchmark of the central bank, reaching about 13-14%.

The recovery of Ukraine’s industry last year was interrupted by the severance of trade ties with the temporarily occupied territories of Donetsk and Luhansk regions, as a result of which the economy lost up to 1.5% of GDP growth.

The delay in the adoption of the law on privatization and on the establishment of an anti-corruption court, as well as the government's reluctance to raise the price of gas for the population in the current heating season, led to the suspension of Ukraine's cooperation with the IMF and, accordingly, the halt of external financing from both the European Union and the World Bank.

All this affected the mood of foreign investors, who reduced investments in the country from $4.4 billion in 2016 to $2.5 billion in 2017. According to the State Statistics Service, GDP growth in the third quarter of 2017 slowed to 2.1% from 2.3% in the second quarter, with growth in consumption became the base of growth amid a shortage of investments.

At the same time, such a source of growth as consumer demand, other than GDP growth, leads to an increase in inflation, which ultimately leads to a drop in real incomes of citizens. Therefore, in order for the economy to grow not only on paper, but also be felt by citizens, the government and legislators need to make efforts to improve the investment climate and continue to reform all spheres of public and state life. Without progress in key issues for businesses and investors, it is impossible to achieve growth at 5-8% per year. And without this, the restoration of prosperity at the level of the pre-crisis 2013 will take another five to six years.

"As structural reforms have stopped, we do not see strong drivers for either the economy or investment. Partly, the situation can be saved by consumer demand, but it should be understood that this is an inflationary source of growth. Without large-scale privatization, forex liberalization and the opening of the land market, we see no significant positive factors that could bring growth to a new level," experts at the Center for Economic Strategy believe.

Analysts noted that until the Ukrainian authorities systemically demonstrate their readiness to implement structural reforms, we shouldn’t expect a significant inflow of investments. And although last year the government managed to conclude an agreement with General Electric on localization of production of locomotives and agreed on attracting Chinese investments in the banking sector, these are agreements of the upper political level rather than a sign of a soon-to-come investment rain.

Without the adoption of legislation on privatization, the opening of the land market, the reform of the judicial system with an increase in the level of protection of property rights and forex liberalization, a significant inflow of foreign investment is unlikely.

The government expects adoption in the first half of 2018, with the support of Parliament, of important decisions that will make it possible to achieve economic growth of 5-7% in subsequent years.

"In fact, I believe that if we manage to consolidate and take about ten economic initiatives, in the fourth quarter of 2018 there will be super-great economic growth," Prime Minister Volodymyr Groysman said at his final press conference.

Nevertheless, at the moment, the government lays a restrained 3% growth in the country's main financial documents, which is lower than the forecasts by the IMF and the NBU, which believe that Ukraine's GDP will grow by 3.2%. The World Bank believes that the economic growth in Ukraine in 2018 will be at 3.5%.


Experts’ forecasts

Experts interviewed by UNIAN assure that next year the country’s economy will have to cope not only with macroeconomic challenges, but also political risks of slower reforms. Nevertheless, in their opinion, the economy of Ukraine in 2018 will grow by 3%.

As analysts emphasize, next year's economic growth will be based on higher global resource prices and, accordingly, the growth of exports and domestic consumption. Meanwhile, to accelerate economic recovery, the country will need foreign investment, which is impossible without land reform, successful privatization and the strengthening of protection of investors' rights.

In addition, analysts unanimously called the main risk of next year the lack of cooperation with the IMF, which will depend on the political will of the authorities in the difficult period of preparation for the presidential and parliamentary elections scheduled for 2019.

Oleksandr Parashchy, head of the analytical department at Concorde Capital Investment Company:

The economy is showing a steady recovery. Next year, the negative impact of the blockade of the occupied Donbas will cease. There are also positive expectations on export prices. The question is not whether but rather how fast the economy will grow. But there are risks associated with the IMF program and other external financing programs. In the pre-election years, the chances of meeting IMF requirements are very low, which could lead to a weak inflow of foreign currency throughout the year. This will be no tragedy, but this will become a problem when paying off foreign debts. There are pretty weak hopes for foreign investment, too, as some signals coming from Ukraine are rather alarming while investors are very sensitive to such things. In addition, the question of privatization is unlikely to move from the deadlock in those couple of years before the elections. GDP growth in 2018 will reach 3.5%, industrial production will grow by 4.6%, while the inflation will slow down to 8.9%.

Head of the Analytical Unit of the ICU Group Olexandr Valchyshen:

Driver for the economy in 2018 will be consumer and government spending, as well as investments in fixed assets. The deterrent factor will be the need to minimize the state budget deficit due to the need to have access to external creditors, and support for the stability of the exchange rate through a high interest rate by the NBU. Economic growth in 2018 will reach 3%, industrial production will grow by 2% as compared to 2017, while average inflation will not drop to 13% by the end of the year. The domestic financial market will gradually be used to invest in fixed assets.

Erich Arispe, Director at FitchRatings' Sovereigns group:

Ukraine’s growth to reach 3.2% in 2018 driven primarily by domestic demand. Private consumption benefits from improvement in real incomes and increased access to credit. Investment could continue to experience a cyclical recovery, but reaching greater investment levels to facilitate higher growth will be dependent upon further improvements in terms of macroeconomic stability, progress in the reform agenda benefitting the business environment for Ukrainians and foreign investors. Investment to GDP in Ukraine (estimated at 21%) is low when compared to similarly-rated countries.

Although not part of our base case, risks for the economy stem from the material escalation of the conflict in eastern Ukraine, loss of reform momentum, increased external financing constraints and policy and/or political uncertainty. On the positive side, greater than anticipated progress in the reform agenda could lead to increased confidence and access to external financing, thus boosting growth prospects and reducing financing risks for 2018 and 2019.

Executive Director of the Bleyzer Foundation Oleh Ustenko:

This year, Ukraine's open financing needs amount to about $7 billion. This money should be taken from the IMF, the EU as we should enter foreign markets. If the IMF refuses, there will be no other financing. Against the backdrop of the poor economic situation in 2018 relative to other countries, we will see an intensification of migration processes, and additional political turbulence. So the task of politicians is to please the masses as much as possible. And they will do this even at the expense of the economic situation. The next year is the year of challenges.

If there were active reforms, the growth in Ukraine would be 5% or more. Creating an anti-corruption court and ensuring the rule of law can give a significant impetus to the development of the business climate in the country.

The country’s economy is small - it does not reach $100 billion. Each additional billion can provide an additional 0.5% of growth. The colossal potential is our shadow market, which, according to various estimates, reaches up to 50%. That is, there is a chance to restart the economy, increasing its volume by almost 1.5 times.

Tomas Fiala, CEO of DragonCapital:

The lack of cooperation with the IMF is the main risk because it can adversely affect the hryvnia exchange rate, while businesses and population are very sensitive to this. I very much hope that we will continue our cooperation with the IMF. But it seems to me that the government and presidential administration would be happy to do without the IMF as they do not really want to fulfill the Fund’s requirements. The laws necessary to continue cooperation with the IMF, such as on creating an anti-corruption court and privatization, will be adopted in the first quarter of 2018, and in the spring, gas prices for the population will be raised, which will correspond to the formula for the calculation of a fair price.

Restrained expert predictions suggest that there is no need to expect a breathtaking economic boom next year - global economic reforms will be postponed until the post-election period. Economic growth next year will depend on commodity prices, export prospects and domestic demand, which will grow after another increase in the minimum wage. At the same time, macroeconomic stability and the exchange rate of the national currency will continue to depend on continued cooperation with the International Monetary Fund and other donors. In fact next year our country should carry out large payments on a public debt, and we cannot deal with it without creditors’ support.

Therefore, the main tasks for 2018 will be the victory over populism, the continuation of the program of cooperation with the IMF and the struggle for investment, so as not to allow the economy to roll back. To achieve this goal, there is much work to be done by everyone.

Ksenia Obukhovska

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