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The Road to Recovery?

Phoenix Capital, Kyiv, Ukraine, Thu, August 27, 2009

KYIV -  The Ukrainian economy is suffering its worst crisis since the mid 90s. GDP is expected to decline by 12.9% y-o-y in 2009, largely due to a decline in demand for industrial goods exports and an outflow of foreign capital. Since last fall the crisis has spread into the whole economy, hitting banks, trade and government finances hard.
Nevertheless, we are optimistic about the economy in 2010. We expect 4.5% y-o-y GDP growth. The crisis began in exports and so will the recovery. International trade recovers faster than global output, and as it recovers it will pull up Ukraine’s export-oriented metallurgy and machinery sectors.
The major threats for the economy are poor government finances and the poor quality loan portfolios of Ukraine’s banks. The consolidated budget deficit is expected to reach 7% of GDP this year and the share of non-performing loans has already reached 28.8%.
GDP decline reached 20.3% y-o-y in 1Q2009; the decline in 2Q2009 is estimated to be 18.0% y-o-y. The Ukrainian economy is suffering under a downturn in industrial output by 26.7% y-o-y, in trade by 21.5% y-o-y, in transportation by 44.3% y-o-y as of 7M2009.

Agriculture still shows positive dynamics with 3.8% y-o-y growth as of 7M2009, however, once the harvest is complete that dynamic will decrease—the grain harvest is estimated to be 37 mln t, much lower than 53 mln t harvested in the previous year.
We revise our major economic forecasts for 2009. We based our forecasts on a sharp decline in exports, an increase in NPL share to 25-30%, a deep crisis in retail trade, a decline in the grain harvest to 42-43 mln t, and a budget deficit of 7-10% of GDP (see PHNC Ukrainian Strategy 2009, Dec 23, 2008).

Though these forecasts were fairly accurate, we underestimated the pace of decline. We alter our GDP growth forecast from -9.9% y-o-y to -12.9% y-o-y in 2009. In contrast, we based our exchange rate forecast on the assumption that the NBU’s administrative pressure on the interbank market would prevent Ukraine from receiving the IMF loan.

However, the IMF allowed the NBU to use its administrative power to hold the exchange rate. As a result we change our UAH/$ forecast from 12.0 to 8.5 as of the end of 2009.
We believe industry will drive the 4.5% y-o-y GDP recovery in 2010. Industrial output is growing on recovering external demand for Ukrainian steel and machinery. Steel output increased by 76% in July 2009 after a low in November 2008.

We expect the pace of recovery to slow in the coming months, but the metallurgy sector will still grow 17% y-o-y 2010. At the same time, weak domestic demand will hold back the growth.

NOTE:  For more details with statistical charts and graphs (in color) please see file in the attachment.

LINK to PDF: http//www.usubc.org/Phoenix-Capital-Ukrainian-Economic-Outlook-27Aug2009.pdf