Population 45.37 million
GDP 180.174 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
| GDP growth (%) |
4.1 |
5.2 |
0.2 |
-0.5 |
| Inflation (yearly average) (%) |
9.4 |
8 |
3.8 |
6.9 |
| Budget balance (% GDP) * |
-5.8 |
-2.7 |
-3.3 |
-4.5 |
| Current account balance (% GDP) |
-2.2 |
-5.5 |
-6.4 |
-7.6 |
| Public debt (% GDP) |
40.5 |
36 |
34.7 |
35.1 |
| (e) Estimate (f) Forecast * Excluding investments financed by international donors | ||||
STRENGTHS
- Strategic position between Russia and the European Union
- Considerable agricultural potential
- Cheap skilled labour
WEAKNESSES
- Poor economic diversification and dependence on metal and imported gas prices
- Over-indebtedness of the private sector
- Political insecurity making it difficult to apply a consistent economic policy
- Weak banking sector
- Persistent shortcomings in the business environment
Risk assessment
Worsening economic situation with contraction in growth likely in 2013
There was a sharp slowdown in activity in 2012 and the economy is likely to contract in 2013. GDP shrank in the 1st quarter 2013 (-1.3% against the 1st quarter 2012), confirming the downward trend noted since mid-2012. The decline has been particularly marked in the industrial (-5%) and construction sectors (-16.8%), whilst the agriculture sector continues to grow (+5.8%). The Ukrainian economy is suffering because of weak foreign demand, resulting from the poor economic performances of its trading partners (Eurozone, Russia and other countries in the CEI), which should continue for most of the year.
Household consumption, sustained so far by a policy of expansionary public spending, could be hit by the expected upsurge in the rate of inflation in 2013 (namely higher food prices) and which could be exacerbated by the probable increase in gas prices being demanded by the IMF in return for a new loan. The growth of private sector will remain slow, suffering from European banks withdrawal from the market and a restriction by the Central Bank on liquidity within the banking system.
Public finances and external accounts becoming increasingly fragile
Fiscal consolidation in 2012 was hampered by weak growth and increased spending ahead of the elections (legislative in October 2012). At the same time, whilst structural reforms were being implemented (such as in terms of pensions), the delay in the application of certain others, such as the removal of subsidies on gas prices, continue to burden public finances. Public expenditure has risen appreciably to reach 52% of GDP in the first quarter 2013 (46% in 2012).
The slowdown in export sales and the leap in imported gas prices all helped drive up the current account deficit in 2012 and this should continue in 2013.
As the financing of these twin deficits comes mainly from non-residents, with the scarcity of domestic capital following the freeze in the IMF programme of 2011, this is contributing to seriously undermining the balance of payments.
The pressure on the hryvnia led the Central Bank to dig deep into its reserves in order to maintain the pegging against the dollar. The level of currency reserves at the end of December 2012 represented less than 3 months’ imports. Given the level of pressure on the currency liquidities, the Central Bank allowed the currency to depreciate slightly relative to the dollar during the second-half of 2012. Despite this there is still a serious risk of further devaluation in 2013, and this would have a negative effect on household consumption, by increasing the cost of imported goods as well as having a significant knock-on in terms of the sovereign, private and banking debt risk. Half of the public debt, which is in excess of 30% of GDP, is denominated in foreign currencies. On top of this, the private sector and the banks (already struggling with almost zero profitability, and with non-performing loans amounting to 15% of all credit) are very highly indebted with non-resident creditors in dollars. The situation will become increasingly critical for Ukraine as the maturity dates approach on its private and public sector debt (including an IMF loan). In a context of limited access to the financial markets, the reduction in the constraints on the external accounts will take the form of a new agreement with the IMF. The negotiations with the Fund continue to stumble on the implementation of the reform of subsidies on gas prices.
Whichever strategy is chosen by the government in 2013 (higher gas prices and/or devaluation), there is a high risk of social unrest.
The business environment remains poor
In political terms the Party of Regions of President Viktor Yanukovych won the October 2012 legislative elections, giving it a majority of the seats in Parliament. The leading opposition parties however did not accept this victory, accusing the Party of Regions of fraud. Despite the success, Viktor Yanoukovitch’s popularity has thus declined. The continued detention of Julia Timoshenko and the desire of the President to strengthen ties with Russia are contributing to growing discontent in the western part of the country, where a majority favours closer links with the EU. The country is divided along geographic, linguistic and social lines, which tends to promote political instability.
The business environment also remains as a recurring weakness: The regulatory context is very unstable with a lack of transparency of company structures. These companies are also highly vulnerable to shocks and this means credit risk remains at a high level.
