MBS Blog

A short video of the Privoz Market here in Odessa. A good snapshot into the day-to-day life of Ukrainians.

Privoz Market in Odessa, Ukraine

Ukraine Macroeconomic Situation

SigmaBleyzer January 22, 2009

According to preliminary data, Ukraine’s real GDP grew by 3.6% yoy over January-November 2008. Given the sharp deterioration of real sector performance during October-November, unfavorable prospects for the global economy and domestic financial turmoil, we now expect GDP to grow by 2.0% yoy in 2008 and to contract by about 3.0% yoy in 2009 with still significant downside risks.

• Ukraine’s fiscal position remained strong during January-October 2008 as the consolidated budget was in surplus of 0.9% of period GDP. As a result of budget amendments at the beginning of December, the targeted budget deficit was raised to 2.5% of GDP.

• In late December, the Ukrainian parliament approved the 2009 budget with a planned deficit of 3% of GDP contrary to the IMF commitment to have a balanced budget in 2009. Additionally, there are a number of other issues suggesting that 2009 will be quite a challenging fiscal year for Ukraine.

• Consumer inflation is estimated to be around 22% yoy in 2008 and about 15% in 2009.

• The reversal of international capital flows and worsening macroeconomic fundamentals caused the Ukrainian Hryvnia to depreciate. These pressures, amid the lack of transparency and coordination among monetary and government authorities, transformed into a full-scale currency crisis. As a result, the Ukrainian Hryvnia lost more than 50% of its value with respect to the US Dollar in 2008.

• Our estimates of Ukraine‘s net external financing needs indicate that although 2009 will be a difficult year for the country, the situation still looks manageable.

• Ukraine failed to agree with Russia on a new gas contract for 2009. The new gas dispute may have both positive and negative consequences for Ukraine.

Economic Growth

Economic conditions in Ukraine have been deteriorating more sharply and earlier than we expected.

Hit by the combined shock of rising risk-aversion on the global financial market amid growing worries over the health of the Ukrainian banking system, falling world commodity prices and domestic policy tightening, Ukraine’s gross domestic product shrank by 2.1% yoy in October and 14.4% yoy in November. This brought cumulative January-November GDP growth to 3.6% yoy, down from 6.9% yoy in January-September. Significant contributors to a steep deterioration in overall growth were industry, domestic trade and construction, the sectors that used to be engines of growth in previous years. The value added growth in these sectors eased to -0.5% yoy, 2.3% yoy and -12.7% yoy in January-November, down from 5% yoy, 9.4% yoy and -16.1% yoy respectively in the first nine months of the year. In November, only agriculture and transportation/ communication sectors still reported vigorous value added growth, advancing by 18.0% yoy and 9.3% yoy respectively. At the same time, November’s performance in these sectors was slightly worse than in the preceding month (over the first ten months of the year, value added grew by 18.3% yoy and 10.4% yoy respectively).

Industrial performance was disappointing. Industry reported an almost 20% yoy decline in production in October. Moreover, the situation worsened in November as industrial output contracted by 28.6% yoy. Thanks to decent growth in the first nine months of the year, industrial production declined cumulatively by 0.7% yoy over January-November.

The deterioration was particularly sharp in export-oriented and consumer-credit-sensitive branches (metallurgy, chemistry and transport vehicles).

Abated by high input prices and a continuing fall in world steel and chemical prices, metallurgical and chemical production sank by 35.6% yoy and 19.2% yoy in October and almost 50% yoy and 35% yoy in November respectively. Closely linked to metallurgical performance, the mining industry showed 10% yoy and 60% yoy declines in output in October and November on the back of a 21% yoy and 60% yoy drop in ore extraction respectively.

Higher credit costs and tighter lending standards as well as declining import demand from CIS countries (the main destination for Ukraine’s export of machinery and transport equipment) caused an 18% yoy decline in production of vehicles in October and an almost 52% drop in November. The overall production in the machine-building industry declined by about 40% yoy in November, while it grew by 14.6% yoy just two months before. Food processing production continued to fall, declining by 9% yoy in November. Despite a record-high harvest this year, the industry experienced an acute deficit in agricultural raw materials (due to the presence of significant lags, the supply of a number of agricultural products such as meat, milk, etc., continued to be affected by the poor 2007 harvest).

The outlook for the rest of this year and the next one is quite bleak. A number of claims suggest a severe deterioration in the labor market since September.

Growing unemployment and pro-cyclical fiscal tightening (in accordance with the IMF program), combined with the ongoing credit squeeze and depreciating national currency signal for more retrenching consumer behavior in the future. As private consumption was the main driver of economic growth over the last five years and accounts for almost 60% of GDP, its downturn will exact a significant toll on economic growth. Moreover, exports (an important source of economic growth accounting for about 50% of GDP) and earnings are likely to experience difficulties in 2009. The benefits from the weaker national currency for Ukrainian exporters may be eroded by the global downturn and low commodity prices.