Prospects positive after a robust 2019
Despite concerns about doubled elections and the new president’s unusual background, 2019 appeared especially good in economic terms. A $4.9 billion inflow into hryvnia-denominated state bonds; a $2.9 billion payment from Gazprom mandated by the Stockholm arbitration; a 17% strengthening of the currency; a new record-high grain harvest; inflation slowing to 4.1% ytd, below the 6.3% target; and an almost flat CAD, all create a rosy picture for Ukraine. Even MinFin’s problems with state collections, which stem from the strong hryvnia and slower inflation, and the recession in industrial production, didn’t overshadow the general positive picture. We estimate that GDP has sped up to 3.6% y/y in 2019, from 3.3% y/y a year ago.
To large extent the success of 2019 was the result of lucky coincidences, we believe. It will be difficult to replicate all of those positive features again. Meanwhile, negative trends, with subdued industry performance and a 27.5% drop in natural gas transit, are sure to arrive.
Yet we expect the economy to remain on the upswing, growing 3.1% y/y in 2020, backed by strong private consumption and fixed asset investment.
The CAD will expand to $6.9 billion, or 4% of GDP, in 2020 (from $4.3 billion, or 2.9% of GDP, in 2019) on the back of falling proceeds from gas transit, and further decline in metal exports. Luckily, hydrocarbon prices are expected to remain subdued.
Despite the expanding CAD, we expect the hryvnia to remain predominantly stable, at about 24-25 to the dollar in coming years. Rising capital inflows should offset trade deficit growth.
Ukraine unfortunately did not see substantial FDI pick up in 2019, which should be normal for a year of doubled elections. But we hope the situation will improve in coming years, especially after non-residents experienced good results in 2019. We expect further capital inflows into hryvnia-denominated state bonds, more Eurobond placements and resumed cooperation with the IMF, too. Mounting capital inflows are expected to push gross international reserves in 2020 up to $28.1 billion, or 4.1 months of imports.
Inflation should remain in the single digits. For 2020, we project CPI at +4.4% ytd, or +3.5% y/y. The NBU will keep easing, and we expect the prime rate to be cut to 8% by yearend. The Finance Ministry will experience difficulties, given slower inflation and the strong hryvnia. The spending plan looks overoptimistic, even just two months after it was approved. A revision of the spending plan is on the agenda. But we don’t foresee the budget deficit exceeding 2% of GDP in coming years.
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