S&P worsens its economic forecast for Ukraine in 2015 / Photo from uk.wikipedia.org
Standard & Poor's Ratings Services predicts a 15% economic contraction in Ukraine in 2015, while its earlier forecast was set at 7.5%.
"Following the 6.8% real GDP contraction in 2014, we believe Ukraine's economy will likely shrink by about 15% in 2015, reflecting low confidence and damaged financial stability," S&P said in a statement on October 19.
"We think, however, that an improvement in security conditions will likely fuel a potentially stronger economic recovery in 2016, leading to some upside potential to our 2% GDP growth projection," the statement said.
According to S&P, during the third quarter of this year, the economy posted modest positive growth on a quarterly seasonally adjusted basis.
"We expect support for state-owned national gas company Naftogaz and banking-sector recapitalization costs to weigh on fiscal balances, although the NBU [the National Bank of Ukraine] will likely monetize a large part of the fiscal impact," S&P said. The envisaged fiscal consolidation — a reduction in public-sector employment, freezing of pensions and wages in nominal terms, and tariff hikes — will weigh on growth, as will the 25% year-to-date nominal depreciation of the Ukrainian hryvnia against the dollar, which has passed through into rising inflation.
Nevertheless, high inflation partly reflects reforms the government has made, S&P said.
"In particular, increases to administered prices account for almost one half of price rises this year, according to our projections. The current government is the first in two decades to cut subsidies on household gas consumption, leading to the tripling of gas prices, while introducing means testing for lower income consumers. The IMF program targets the elimination of the budgetary transfers to gas supplier Naftogaz by the end of 2017," the statement said.
In S&P's view, "this alone confirms the current government's seriousness about restoring fiscal and economic stability."