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 |
3 |
3.5 |
| Inflation (yearly average) (%) |
9.4 |
8 |
3.8 |
6.9 |
| Budget balance (% GDP) * |
-5.8 |
-2.7 |
-3.3 |
-3.5 |
| 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
Growth will remain weak in 2013
Activity slowed distinctly in 2012 and growth will remain weak in 2013. Exports will continue to suffer from sluggish demand from Europe, the country’s main trading partner (destination for 25% of exports). The manufacturing and agri-food sectors, which are very export-oriented, will still, therefore, be affected by the eurozone recession. Moreover, the terms of trade are likely to still adversely impact negative the trade balance: world prices of the commodities exported (particularly steel) remain very low, while those of imported energy (oil and gas) are still high. Hydrocarbons represent 35% of imports and non-precious metals 32% of exports. As for domestic demand, private consumption will be inhibited by probable rise in the gas price demanded by the IMF. A devaluation of the currency would also hit household consumption. The growth of credit to the private sector will remain sluggish, still affected by the decommitments of the European banks. Finally, consumption will suffer from the upturn in inflation in 2013. This was actually exceptionally low in 2012 due to lower food prices and slower activity. But the steady rise in wages and unit labour costs argue for a rebound in 2013.
High risk of devaluation in the short term
The external accounts and public finances are weak. The slowdown in exports and soaring imported gas prices contributed to the widening of the current account deficit in 2011 and 2012. At the same time, though some structural reforms have been undertaken (such as that of pensions), the delay in implementing certain others such as the abolition of gas price subsidies continues to weigh on the public finances.
Since the funding of these twin deficits comes mainly from non-residents, the increased scarcity of foreign capital, following the freezing of the IMF programme in 2011, has noticeably worsened the balance of payments. Due to pressure on the hryvnia, the Central Bank has had to dig deeply into its reserves in order to maintain its peg to the dollar. As a result, reserves fell by 30% between August 2011 and October 2012 and now represent only 3.5 months of exports. Meanwhile, confronted with these pressures on foreign exchange liquidity, the Central Bank began to allow the currency to depreciate slightly against the dollar during the second half of 2012. In spite of this there is a very high risk of a marked devaluation in 2013.
The situation will be all the more critical since Ukraine is faced with substantial private and public debt repayment deadlines. In a context of restricted access to the financial markets, easing the constraints on the external accounts will need a new agreement with the IMF, which requires implementing the reform of gas price subsidies, considered by the IMF as a prior condition for any further cooperation. Without this, a devaluation of the currency would be inevitable and there would be major repercussions on sovereign and bank risk: half of the public debt is denominated in foreign currencies, while the banking sector is very indebted in dollars to non-residents. Whatever strategy the government chooses in 2013 (gas price rise and/or devaluation), the risk of social unrest is high.
Finally, the banks are still weak: apart from their exposure to exchange rate risk, their profitability is next to zero and non-performing loans stand at 15% of all loans.
A still unsatisfactory business environment
Politically, President Viktor Yanukovych’s party of won the legislative elections in October 2012, which gives him an absolute majority of seats in the Parliament. However, the main opposition parties have not recognised this victory, accusing the Party of Regions of fraud. Despite this success Viktor Yanukovych’s popularity has waned. The continued detention of Julia Timoshenko and the president’s desire to strengthen ties with Russia contribute to the growing discontent in the west of the country, where the majority favours a rapprochement with the EU. The country suffers from geographic, linguistic and social divisions, which foster political instability.
Moreover, the business environment remains a constant problem: the regulatory framework is very unstable and businesses lack transparency. They are moreover highly vulnerable to shocks, keeping credit risk at a high level.
