A sustainable recovery that elections could upend
Ukraine’s economy was clearly experiencing a healthy recovery in 2018. GDP sped up to +3.2% y/y, from +2.5% y/y in 2017. Inflation slowed to +9.8% ytd from +13.7%. The hryvnia remained largely stable, losing a negligible 2.2% on average through the year, and even strengthening in the last days of December to UAH 27.70/dollar, vs. UAH 28.10 in December 2017, on the back of the IMF deal. The budget was successfully balanced, with the deficit within the initially targeted limits, according to a MinFin report.
External accounts delivered disturbing news, however. In 2018, the CAD appeared to be double our initial expectation: we’d projected it at $4.9 billion, or 3.8% of GDP. Nearly flat export growth for foodstuffs, coupled with a steady revival of imports, was the main reason for a sharp CAD increase in 2018. In 2019, we expect CAD expansion to be less dramatic, given the record-high 2018 grain harvest.
Despite the wider CAD, Ukraine managed to build up gross international reserves to $20.8 billion (or 3.5 month of imports), from $18.8 billion a year ago. Eurobonds worth $2 billion, an IMF wire of $1.4 billion, an EU loan of €0.5 billion, and the active placement of local dollar-denominated bonds contributed the most to this result.
For 2019, we expect GDP growth to slow to 2.9% y/y, as investment activity subsides in the run-up to the March 31st elections. However, inflation is projected to ease further, to 6.3% ytd. The hryvnia should demonstrate only modest depreciation, about 2.5% on average through the year. We do not expect active external borrowing in 2019, as accumulated gross reserves should be enough to service debts.
Everything looks good, other than unpredictable presidential and parliamentary elections. Recent hype around the candidacy of comic Volodymyr Zelenskiy, who announced his candidacy on New Year’s Eve, made it clear that Ukraine should be ready for major swings and U-turns over the next 10 weeks. Hopefully, base-line macro-trends won’t suffer much from the creativity of political spinmeisters. Still, things could become quite messy before the dust settles.
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