Ukraine MinEconomy reduces GDP growth forecast to 0% for 1H16

The composite production index for commodities and services fell 2.8% yoy in January and GDP dropped 2.1% yoy during the month, Economy Ministry reported on March 4. The biggest factor was transit and trade restrictions imposed by Russia as of the new year. “The new wave of economic aggression from Russia came on the top of already active negative trends with sliding resource prices on the global market and sluggish external demand,” the ministry said. As a result, Ukraine’s economy returned to recession after two quarters of recovery in 2015, claimed the ministry. Thus, the Economy Ministry reduced its GDP forecast for the first half of 2016 to 0.0% yoy from 1.0% yoy growth estimated previously.

Ukraine’s GDP decline slowed to -1.2% yoy in 4Q15, compared to -7.2% yoy in 3Q15, -14.6% yoy in 2Q15 and -17.2% yoy in 1Q15. Ukraine’s 2016 state budget was drafted based on a 2.0% GDP growth assumption for the year.

Alexander Paraschiy:  We did not share the ministry’s initial optimism and now see this forecast revision as a step towards more realistic estimates. Moreover, the role of Russia’s aggression in the result might have been overestimated. According to the provisional balance of payments data the NBU released, the main factor in declining exports (53% of commodities contraction) stemmed from falling exports to Asia while exports to Russia were responsible only for 13% of declining commodities. So resource prices have been dominant, while problems with Russia just added extra pressure. Resource prices picked up in February (as the IMF’s composite metal index increased 5%) in what promises stronger performance, though we don’t see any changes in the overall trend. Against this backdrop, we are keeping our projection of 0.6% yoy GDP growth for 2016 (and -0.9% yoy in 1H16), anticipating minor improvement in 2H16.