Exports set to kick-start growth as weakness at home continues
Weak industrial output and exports continue to delay any recovery. While growth will be little better than zero this year, a gradual recovery in the EU and Russia will enable an export-led return to growth in 2014-16. However, the upturn will also require renewed bilateral or multilateral loans to finance the large budget and external deficits. We forecast GDP growth of 2.5% in 2014 and then a pick up to almost 5% in 2016. However, uncertainty ahead of presidential elections in early 2015 may dampen prospects.
Having fallen sharply over the past year, inflation will accelerate to some 5%-6% in 2014-17 as the lar ge fiscal deficit (close to 6% of GDP in 2013) forces subsidies on energy and consumer goods to be withdrawn. This may help investment by deepening the fall in real interest rates. However, it will delay monetary easing and may put pressure on the Ukrainian hryvnia. The currency is already at risk from the large external deficit and lower reserves that have been whittled away by debt repayments.
Lower imports are helping to contain the large current account deficit , which is set to fall to 7.4% of GDP in 2013. But heavy debt service costs and lower reserves mean that a new IMF standby or fresh bilateral loans are needed soon. Prospects for greater capital inflows would be enhanced by an association agreement with the EU, although this could exacerbate tensions with Russia.
Government budget balance
Source: Oxford Economics.
Source: Oxford Economics; World Bank.
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