Economy and politics
September 30, 2008In the eye of the storm: Ukraine's economy amidst global crisis
From mid-2007 till now, it has been a difficult period for the global economy. Despite not being fully integrated into the global economic system, the Ukrainian economy has felt the influence of the economic crisis. In this report we analyze the performance of the Ukrainian economy in 2008 so far and give our forecast for the macroeconomic performance towards the end of 2008 and onwards.Executive summary The Ukrainian real sector grew at impressive rates in 2000-2007. While we anticipate that the global financial crisis and the anti-inflationary war will somewhat slow down the GDP, real GDP growth will nevertheless stay between 5 and 6.5% for the next five years. The machinery, trade and transportation sectors will continue to be the main driving forces of the real sector’s growth. The performance of the chemical and metallurgical sectors will depend heavily on global markets, while Ukrainian agriculture may get a boost if the Parliament lifts the land trade moratorium. As we anticipate world steel prices to decline and imported natural gas prices to rise, we forecast the worsening of an already high trade balance deficit, driving a slight UAH devaluation in 2009. Despite record inflation in late-2007 to early 2008, we see clear signals of price stabilization, driven by the economy’s cool-down and the government’s anti-inflationary policies. While we anticipate inflation to stay double-digit until 2010, we view the recent summer deflation as the beginning of a CPI growth rate slowdown. While Ukraine observed the collapse of the Parliament’s coalition in September 2008, we anticipate the consolidation of major political forces as we witness a very effective current lawmaking process in the Parliament, coordinated by recent foes – the Bloc of Yuliya Tymoshenko and Party of Regions. While we see some possibility of the President dissolving Parliament, we do not consider the odds of this happening to be very high.