Exports and remittances more important than IMF funding

UKRAINE - Forecast 11 Jul 2018 by Vladimir Dubrovskiy and Dmytro Boyarchuk

The big question in the air is whether Ukraine can survive 2019 without help from the IMF. The media shared key messages from a report released by the NBU, which projected that the hryvnia would depreciate powerfully under a “no IMF” scenario, especially if prices of resources on global markets fell. In fact, falling resource prices would nudge Ukraine into new depression, no matter what happened with the IMF. And vice-versa: if export proceeds remain strong, Ukraine can push ahead to 2020, even if a 2018 deal with the Fund never happens.

First of all, the Ukrainian economy is in good shape. In Q1 2018, GDP growth sped up to 3.1% y/y. Local investments in fixed assets, up +17% y/y, and private consumption, up +5.5%, are driving growth. Moreover, this is happening despite scarce FDI inflows, of only $0.7 billion by May, and poor access to external markets. Though the economy is small, it is benefiting from strong export sales, growing remittance inflows, and stability. In our view, no matter what happens with the IMF, Ukraine will grow 3.2% y/y in 2018, and 3.7% y/y in 2019.

Much more important for Ukraine’s smooth survival in 2019 will be strong foreign currency inflows from exports and remittances. The CAD was reportedly only $0.4 billion by May. This trend promises a CAD of $2.6 billion, or 2.1% of GDP, by the end of the year -- a completely safe level. Remarkably, the trade deficit has been expanding as fast as predicted, up to $2.9 billion by the end of May, vs. $2.36 billion a year ago. But this was offset by rising wage remittances transferred from abroad, of $4.4 billion for May, vs. $3.3 billion a year ago. This trend looks sustainable in the medium term.

Financial flows are still a problem. Capital inflows were only $699 million by May, far below the $1.1 billion of a year ago. If Ukraine gets lucky, and the IMF deal is signed, the country will have $20 billion, or 3.4 months of imports, in gross reserves by the end of the year. Under a “no IMF” scenario, the amount will be $16.3 billion, or 2.5 months of imports, even in 2018.

Given the country’s good economic position and strong foreign currency inflows, we continue to see hryvnia stability. The currency has been hovering around UAH 26 per dollar for three months now. We expect the traditional seasonal depreciation this September, and a fall to UAH 30 by the end of 2018. For 2019, we expect the hryvnia to repeat its seasonal trajectory, strengthening through summer, and then depreciating to UAH 31 by yearend.

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