Ukraine Politics April 2017


Ukraine: Fresh IMF funds unlocked, but economic blockade sours recovery outlook

April 4, 2017

The International Monetary Fund (IMF) concluded its third review of Ukraine’s economic program on 3 April, unlocking USD 1.0 billion in fresh funds for the country. The announcement came after the government had enacted a number of IMF-mandated reforms including a fiscally disciplined budget, corruption measures and reforms aimed at improving the investment climate. While the result is positive for Ukraine’s economy, the IMF stressed that further structural reforms are necessary to achieve faster and sustainable growth, including pension reform, tough corruption measures and privatizations. Patchy reform momentum due to a lack of political will has delayed payments from the Fund and continued cooperation with the IMF is crucial for Ukraine’s outlook, to ensure that the economy remains on a recovery path.

While April’s announcement is good news for the crisis-stricken economy, recent political developments have damaged the outlook. Tensions with the rebel-held eastern regions of the country are high and on 15 March, the government formalized an economic blockade of the zones, escalating the political crisis and increasing already-heightened uncertainty even further. The blockade has cut off vital links in the country and caused a number of FocusEconomics’ analysts to drastically revise their projections for this year. Commenting on Alfa-Bank’s outlook, Chief Economist Oleksiy Blinov states:

“Production stops at significant industrial facilities in Ukraine's eastern regions have negatively impacted output in the steel sector, coal mining and related industries such as coke refining and freight transportation. We downgraded our real GDP growth forecast for 2017 from 2.7% to 2% and slashed our industrial output growth forecast from 2.5% to 0%. On the balance of payments side, less physical amounts of exports are expected to be compensated by improved terms of trade outlook. We maintain our 2017 current account deficit forecast at 4.5% of GDP.”

Similar to Blinov’s view, Olena Bilan, Chief Economist at Dragon Capital also sees the trade ban hampering real GDP. However, positive factors caused Dragon Capital to hold their GDP forecast unchanged this month, Bilan explains:

“We estimate the halt to trade with the occupied territory may cut real GDP by around 1.0pp and worsen C/A balance by 1.7pp of GDP. Yet,  but we keep our 2017 economic growth forecast  unchanged at 2.5% y-o-y, vs. 2.3% recorded in 2016 and estimate C/A deficit at 4.3% of GDP, slightly worse than las year record of 4.1%. Our forecasts hinges on offsetting factors, such as speedy recovery of domestically-oriented sectors not affected by the blockade and favourable global commodity prices.”

On the other side of the spectrum, Capital Economics has an optimistic view of the country’s growth trajectory, despite political uncertainties. Emerging Markets Economist, Liam Carson, elaborates on their projection for 5.0% growth this year, stating:

“For now, we expect Ukraine to enjoy strong growth over the next couple of years. Of course, the blockade of the separatist-held areas in the east of the country and uncertainty related to the IMF deal present big risks to our forecasts. Nonetheless, the sharp drop in output in 2014-15 has created large amounts of spare capacity in the economy. With demand likely to strengthen on the back of lower inflation and interest rates – together with a recovery in investment and exports – this should provide the conditions for a relatively strong expansion in GDP.”

The recent developments have led the National Bank of Ukraine to drastically revise its GDP forecast for this year. The Bank sees the trade ban subtracting 1.3 percentage points from growth, but an improved outlook for the external environment partly limited the revision and the Bank now sees GDP expanding 1.9% this year (previously expected: +2.8%). FocusEconomics panelists see GDP rising 2.4% this year, which is down 0.1 percentage points from last month’s forecast. For 2018, the panel sees growth picking up to 3.0%.

Author: Angela Bouzanis, Lead Economist

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