Ukraine Financial Sector Report - H1, 2013

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Ukraine Financial Sector Report - H1, 2013

In Q1, GDP in Ukraine contracted by 1.1% year on year. Real GDP amounted to UAH 301.598bn (in current prices). In quarter on quarter terms, GDP grew by 0.6%, which was predetermined by a seasonal factor. GDP per capita amounted to UAH 6,624, down by 0.96% year on year. Ukraine's GDP growth in 2012 slowed to 0.2% from 5.2% in 2011.

Following the announcement most of rating agencies lowered their GDP growth forecast for Ukraine for 2013. Standard & Poor's expects a GDP growth rate of 1% in Ukraine in 2013 under the optimistic scenario. Under the pessimistic scenario, GDP growth in Ukraine in 2013 will be around 0.5%.

Ernst&Young has worsened GDP growth forecast to 1.1%year on year in 2013. In 2014-2016, E&Y expects GDP growth to reach 4% on the condition of restoration of European markets. The EBRD has worsened Ukraine’s GDP growth forecast for the second time this year to 0.5% year on year decline in 2013. The EBRD forecast the recovery of Ukraine's GDP in 2014 by 2.5%.

The IMF forecasts zero GDP growth in Ukraine in 2013. In 2014, the IMF forecasts GDP growth of 2.8%. Inflation may reach 0.5% in 2013 accelerating to 4.7% in 2014. World Bank has maintained its GDP growth forecast for Ukraine at 1% in 2013.

The rating agencies believe that high fiscal deficit, continuous current account deficit and high external debt remain the main challenges for Ukraine. In addition, the national currency de-facto peg to the dollar and declining foreign reserves also remain a concern for authorities. Fitch's forecast assumes some further depreciation in the hryvnia to UAH 8.5/USD by end-2013 and UAH 9/USD by end-2014. Depreciation on this scale would be manageable for the financial system and the economy.

Ukraine's ratings are constrained by S&P’s view of political uncertainty, financial sector turmoil, as well as weak external liquidity. In particular, the agency believes that the government's strategy to secure foreign currency to meet its high external financing needs over the medium term remains dependent on favorable financing conditions in the capital markets. The ratings are supported by Ukraine's still relatively low, although rising, government debt burden and fairly diversified economy.
Fitch notes that Ukraine could strike a new deal with the IMF, thereby unlocking the necessary funds to refinance liabilities to the IMF. However, barring a further sharp deterioration in external financing conditions, Fitch no longer expects Ukraine to reach an IMF deal in 2013.

In addition, Fitch pointed out that Ukraine runs a wide current account deficit of 8% of GDP. The national bank depleted its reserves by 18% to barely two months' of current account payments in the year to end-May 2013 to support the hryvnia. The authorities have limited room to fight any renewed pressure on the currency, raising risks of sharp exchange rate depreciation. High dollarization and foreign-currency exposure makes government solvency, banks' balance sheets and the overall economy vulnerable to such an event.

Number of pages: 30
Release Date: Tue, 09 Jul 2013