Ukraine Business Forecast Report Q1 2015

Date: December 12, 2014
Pages: 52
US$ 1,195.00
Report type: Strategic Report
Delivery: E-mail Delivery (PDF), Download

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Core Views

Ukraine’s economy is headed for a major recession which it is unlikely to emerge from until 2016. Ongoing fighting between the Ukrainian army and pro-Russia forces in the east, and the persistent threat of a military invasion by Russia, raises huge challenges to our ability to forecast the economic outlook over the coming quarters to any meaningful degree of confidence.

EU/IMF financing package will require reforms, including: FX liberalisation (although this is likely to be implemented in stages), partial removal of gas subsidies and potentially pension reform.

Despite the new IMF package, Ukraine’s fiscal position remains poor and is likely to deteriorate over the coming quarters. FX shocks, extended fighting and the growing risk of a banking sector bailout all pose significant challenges to the sovereign debt profile. Ultimately, we believe that Ukraine’s debt load is likely to become unsustainable, necessitating a debt restructuring further down the line.

Putin will be happy with Crimea for now, and will not push military intervention into 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).

Major Forecast Changes

We have revised up our 2014 real GDP estimate slightly, although we emphasise this is because we have adjusted our GDP forecasts to exclude Crimea in order to keep our statistics consistent with the national statistical agency’s decision. The deeper than expected devaluation will also reduce imports more than we initially forecast, reducing the drag from weaker exports. We estimate real GDP will contract by 5.3% in 2014, and forecast a further contraction of 5.2% in 2015.
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook


SWOT Analysis
BMI Political Risk Index
Domestic Politics
Conflict To Escalate; No Early Lifting Of Russia Sanctions
The fighting in Eastern Ukraine will escalate in the near term, with a high risk of new fronts opening up, but the endgame remains a stalemated conflict. Given current security dynamics, there will be no lifting of Western sanctions on Russia until well into 2015 at best.
  Table: Politic al Over view
Foreign Policy
High Risks, If US Arms Kiev's Forces
Any US provision of lethal equipment to Ukraine would risk escalating the conflict substantially. As such, Washington will adopt a 'wait and see' approach in the near term, and calibrate its policy according to Russia's next steps.
Long-Term Political Outlook
Eastern Separatism To Persist, While Myriad Other Risks Loom
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.


SWOT Analysis
BMI Economic Risk Index
Economic Activity I
Recession Until 2016
Ukraine's economy will remain in a deep recession throughout 2015 as the conflict in the east rages on. Soaring inflation, a crippled banking sector and severely weakened currency will keep the economy close to the brink of collapse over the coming quarters.
  Table: GDP By Expenditure
Economic Activity II
Ukraine's Energy Predicament To Increase Russia's Sway
While the gas dispute between Ukraine and Russia has been a major issue in the Ukraine crisis, we draw attention to other aspects of Ukraine's energy predicament, such as coal and electricity shortages, which, in our view, will increase Russia's economic leverage over Kiev.
Fiscal Policy
Credit Event Drawing Closer
Ukraine is likely to experience a credit event in the coming quarters unless further capital injections are provided. Even with additional funding, the devaluation of the hryvnia has severely undermined the sustainability of the debt load.
  Table: Fiscal Policy
Exchange Rate Policy
UAH: On The Brink Of Collapse
The hryvnia will remain under intense pressure for the foreseeable future, and the authorities' ability to defend the exchange rate is highly limited. Until a lasting ceasefire can be reached in eastern Ukraine, the hryvnia will remain vulnerable to deeper downside shocks for the foreseeable future.
  Table: Currency Forecast


The Ukrainian Economy To 2023
Colossal Structural Reform Needed To See Through The Decade
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 ten years. While there is still enormous unrealised potential in terms of political reform and economic catch up, without institutional and economic reform, Ukraine's current economic growth model will prove unsustainable over the coming decade.
  Table: Long-Term Macr oec onomic Forec asts


Operational Risk
  Table: Operational Risk
Transport Network
  Table: Emergi ng Eur ope – Transp ort Netw ork Ris ks
Economic Openness
  Table: Emergi ng Eur ope – Economic Ope nnes
  Table: Top 5 Trade Part ners – Product Imp orts (USDmn unles otherwise st ated )
  Table: Top 5 Products Exported (USDmn unles otherwise st ated )


  Table: Construction And Infrastructure Industry Data
  Table: Construction And Infrastructure Industry Data
Oil & Gas
  Table: Oil Production
  Table: Oil Production
  Table: Gas Production
  Table: Gas Production
Other Key Sectors
  Table: Pharm a Sect or Ke y Indic ators
  Table: Telec oms Sect or Ke y Indic ators
  Table: Defence and Security Sector Key Indicators
  Table: Food and Drink Sector Key Indicators
  Table: Autos Sector Key Indicators
  Table: Freight Key Indicators


Global Outlook
Warning Signs Growing
  Table: Global Asumpti ons
  Table: Developed States , Real GDP Growt H, %
  Table: Emergi ng Markets , Real GDP Growth , %
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