The FINANCIAL -- In 2011, the Ukrainian economy grew by about 5% yoy, up from 4.2% yoy in
the previous year. Private consumption was one of the main drivers of
real GDP growth in 2011.
It expanded by about 14% yoy over the first nine months of 2011. Thanks to a record high harvest of grains and other crops, agricultural sector output was up by 17.5% yoy in 2011. The record high harvest caused a decline in consumer price inflation to 4.6% yoy at year-end, the lowest level in the last 9 years,according to U.S.-Ukraine Business Council.
High growth in agriculture helped to compensate for weakening exports in the second half of the year. Being a very open economy, with exports accounting for more than 50% of GDP, Ukraine is sensitive to global growth dynamics. During 1H 2011, Ukraine benefited from the global recovery, elevated commodity prices and improved access to external financing. The intensification of the sovereign debt crisis in the Euro area since summer 2011 affected global trade developments and hit Ukraine ’s exports.
In real terms, exports declined by 3.4% yoy in 3Q 2011. On a positive note, as exports have significant import content, imports also lost momentum in the second half of 2011. However, as prices of energy resources remained high and imports grew faster than exports, the current account deficit widened to $8.7 billion over January-November 2011. The gap is estimated to reach about 5.7% of GDP for 2011.
The Hryvnia was under depreciation pressure in December 2011, generated by external debt redemptions and strong population demand for foreign currency. Improved banking sector liquidity also added to these pressures. But thanks to improved agricultural exports, higher commercial bank demand for Hryvnias and continuing NBU interventions in the interbank market, the Hryvnia exchange rate remained virtually stable. At the same time, due to unfavorable valuation changes, gross international reserves fell by almost 2% in December compared to the previous month.
In 2012, real GDP growth is projected to moderate to about 3% yoy, mainly on account of a more difficult external environment. At the same time, political uncertainty and a difficult winter crop outlook add to downside factors. Due to a projected lower agricultural harvest, low base effect and higher social spending ahead of the elections, inflation may accelerate to about 9% in 2012.
In 2011, Ukraine ’s public sector deficit (including Naftogaz and Pension Fund) amounted to about 4.5% of GDP. Although the deficit exceeded the IMF target of 3.5% of GDP, the Ukrainian authorities made significant progress in reducing fiscal imbalances. In 2012, the government is set to continue its fiscal consolidation efforts. The 2012 budget law was approved at the end of 2011, targeting the state budget deficit at 1.7% of GDP.
However, the general public sector deficit may be around 3.5% of GDP due to government reluctance to raise natural gas tariffs to the population and likely pre-election fiscal loosening. Despite a further decline in the fiscal deficit, Ukrainian public finances may be under strain in 2012 due to high government borrowing requirements.
Due to moderation of economic growth and likely lower volumes of energy imports, Ukraine ’s current account deficit is projected to improve to about 5% of GDP in 2012. However, coupled with large external debt financing needs and tighter access to foreign financing, this may cause the Hryvnia depreciation risks to materialize during the year.
At the same time, given the still high level of gross international reserves, a notable part of private external debt due to foreign parental or affiliated companies and banks, and the government’s intent to re-engage with IMF, the depreciation is likely to be moderate.
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