Growth set to return despite geopolitical uncertainty

A return to growth is forecast in 2014, led by a recovery in exports to European countries. But risks have moved to the downside as tensions rose in November after the Government decided at the Eastern Partnership summit to postpone finalizing an EU association agreement. And in recent weeks tensions have escalated. These tensions reflect fears about shortterm disruption to trade with Russia, despite the promise of longer-term gains from EU links. The agreement will be reviewed at a summit scheduled to take place in the first half of 2014. We now forecast GDP growth of 1.5% in 2014 and then a pickup to 3.0%–3.7% in 2015–16. Continuing unrest and political uncertainty ahead of the presidential elections in early 2015 may dampen short-term prospects.

Inflation is set to jump to 5% in 2014 as budget constraints force the withdrawal of subsidies, especially on energy. Rising prices, low reserves, a current account deficit of 8% of GDP and a fiscal deficit of more than 6% are all major concerns.

In December, Ukraine secured US$15b in loans from Russia and a cut of around a third in the price it pays for natural gas from Russia. Short-term risks will recede even more if the Government can secure assistance on external deficit financing from the IMF or bilateral lenders. But an IMF deal would still require budget cuts and state enterprise reform, curbing growth and raising inflation in 2014–15.

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