Lucky Zelenskiy inherits a boom
Not only was new President Volodymyr Zelenskiy lucky to enjoy the support of 73% of voters, but he’s also fortunate to have inherited from his predecessor a freshly recharged economy.
Ukraine’s GDP is on a sustainable growth path. Private consumption grew 10.7% y/y in Q1, and promises to rise strongly going forward, driven by soaring remittances from abroad. Investment in fixed assets has been posting double-digit growth for 12 quarters in a row, was up +17.4% y/y in Q1 2019 and is unlikely to slip after the political cycle ends. Global energy prices, though, have slid, resulting in modest trade deficit growth. Non-residents have suddenly turned enthusiastic about Ukraine and the hryvnia, snapping up UAH-denominated government bonds. External demand for local government bonds, coupled with remittances and the trade deficit rise, have translated into steady currency strengthening this year, by +7.1% as of this writing.
The overall macro picture is positive, and we do not see it changing dramatically over the next 18 months. But a few factors could spoil certain statistics. For instance, we should be prepared for a modest grain harvest in 2019, which will inevitably affect GDP growth this year. Crops were at a record high of 70.1 mmt in 2018, and we expect the high baseline to affect 2019 results. On the heels of potentially weaker agri-production, GDP could slow to 2.9% y/y in 2019, from 3.3% y/y in 2018.
Economic growth is likely to also be subdued in 2020, when the Russian-European Nord Stream II is expected to go online. The launch of the new Russia-dominated gas transit route could lead to losses of up to $2 billion in export proceeds for Ukraine. Though the impact will be negative, it won’t be critical. We expect Nord Stream II to depress Ukraine’s transportation sector by -7.7% y/y in 2020. GDP is likely to slow to +2.1% y/y in 2020, while the CAD will widen to $6.9 billion or 4.4% of GDP, from the $5.1 billion or 3.5% of GDP projected for 2019.
A stronger currency and slowing inflation are allowing the NBU to relax monetary policy somewhat. We expect the prime rate to be cut to 16% by the end of 2019.
Inflation continues to slow. Consumer inflation eased to +3.6% ytd by June, vs. 4.4% ytd a year ago. We expect the CPI to slow to +6.3% ytd or +8.4% y/y in 2019. For 2020, consumer inflation should ease further, to +5.3% ytd or +5.7% y/y.
Fiscal accounts look a bit worrisome, with VAT collections underperforming. But the potential shortfall is only 0.5% of GDP, which is not critical for preserving a safe budget deficit of 2.2% of GDP in 2019.
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