Recovery outlook: neither bad nor good
Ukraine survived 2020 rather smoothly, compared to the rest of the world. Economic growth dropped by 4.5% y/y, which is a very good result for Ukraine in the storm of global crisis. Incomes continued to grow. The current account balance reached an astonishing surplus of $6.9 billion, or 4.6% of GDP, on the back of resilient external demand for Ukrainian exports. The country even managed to avoid fiscal crisis, thanks to easy access to the markets amid abundant liquidity globally.
We are cautiously optimistic over the 2021 outlook. Economic growth looks secured. We project a 4% y/y GDP, increasing in 2021. However, a low comparative base seems to be the main ‘driver’ of growth. Soaring export prices offer a chance for faster increase, but no reform progress and scarce investments in production over the recent years make us treat our prospects with a grain of salt.
The trade deficit will be widening in 2021, but skyrocketing export prices for foods and metals will prevent dramatic CAD expansion. Still, a current account deficit looks inevitable. We project $2.3 billion, or a 1.4% of GDP, CAD in 2021.
Recovered risk appetites promise an increase in capital inflow. We’re already observing a return of non-residents into state bonds. We estimate Ukraine will experience a general balance surplus, which will generate appreciation pressure on the hryvnia. Still the NBU is expected to prevent the national currency from excessive strengthening, since that means serious budget losses, as occurred in 2019. We expect the hryvnia to hover near UAH 28/ dollar in 2021.
Inflation is strengthening on the back of soaring global prices for foods and other commodities. Consumer inflation will break a 7% ceiling by February, we estimate. We project CPI to reach +6.7% ytd or +7.3% y/y in 2021.
Faster inflation promises more robust budget collections in 2021. The 2021 spending plan was designed on a rather optimistic macro-forecast, and mounting inflation tendencies lower risks for revenues’ shortage. The budget deficit is expected to be 4.7% of GDP in 2021.
Monetary policy will be sensitive to the needs of the Cabinet. The new governor of the NBU, Kyrylo Shevchenko, looks as though he’s given up on inflation targeting, and has moved to interest rate targeting instead. The NBU most likely will continue the practice of friendly support for the budget, we observed in 2020, should it happen that nonresidents’ demand for state bonds is insufficient to the cover budget deficit in 2021.
Revisited quantitative easing policy by the central banks of leading economies is the main risk for Ukraine. Return of nonresidents in UAH-denominated state bonds and easy access to the market amid a halted program with the IMF was the lifebuoy for Ukraine in 2020. Should it happen that quantitative easing is revisited at some stage in 2021, Ukraine will experience difficulties with serious pressure on the national currency, and substantial problems with deficit financing.
Now read on...
Register to sample a report