Economy hit by political crisis

Separatist movements in eastern Ukraine and tensions with Russia are taking a major toll on the economy. The 1.1% GDP fall in Q1 2014 probably understates the damage done by separatist protests, which worsened in Q2. We now forecast a 5% GDP decline in 2014.

Despite Russia’s agreement to respect Ukraine’s election result and talk to newly-elected President Petro Poroshenko, the recovery will be slow. We now expect growth of just 0.5% in 2015 before a pickup to 3.6% in 2016. This forecast reflects the shared interest of the European Union, the IMF and Russia in reviving Ukraine’s economy so that it can repay external public and private debts.

The reform agenda will be set by the IMF, whose US$17b package is conditional on deep budget cuts, sharp energy price rises, public-sector wage freezes and the removal of controls that could see the Ukrainian hryvnia (UAH) fall sharply and interest rates increase. These adjustments will lead to a sharp rise in inflation and prolong the downturn in investment.

Risks to our new forecast are evenly balanced. A faster upturn is possible in 2015 if political divisions are overcome quickly and exports respond well to the depreciation of the UAH. But there may be further setbacks if pro-Russian protests spread, energy price inflation is not contained, IMF disbursements are interrupted, or the Russian or Eurozone economies falter badly.

RGMF_July14_Ukraine 01_Government budget_V2
RGMF_July14_Ukraine 02_Inflation


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