Ukraine Under Pressure As Q3 Economic Indicators Slip Into The Negative

Economic indicators slipped into negative territory in Q3. To face up to currency pressures, the authorities decided to make exporters convert 50% of their export revenues into local currency. The measure is to remain in effect for six months, while waiting for the economy to improve or the country to reach a new agreement with the IMF.

Despite bad news on the economic front, the government has successfully issued 10-year Eurobonds that will enable it to refinance the next IMF tranche falling due. The bond issue was none too late, right before the country’s sovereign rating was downgraded by two of the three major rating agencies.

Economic indicators slip into the red
Real GDP contracted in Q3, down 1.3% year-on-year (yoy) after two quarters of weak growth (2% yoy in Q1 and 3% in Q2). Industrial production also slipped into negative territory, declining by 1.4% yoy over the first 10 months of the year. In iron and steel, the main industrial sector, activity contracted 5%. Revenues from steel exports plunged 15% in current dollars, but for the moment the decline has been offset by other sectors. Even so, total exports rose only 1.4% qoq in value terms in the first 9 months of 2012, reflecting the sluggish global demand.

The agriculture was unable to offset the shock in the iron and steel sector. The grain harvest fell far short of expectations with a 5.1% yoy decline in production in the first 10 months of 2012, compared with a 17% yoy increase in the same period of 2011. Lastly, construction and merchandise transport declined 10.2% and 6.4%, respectively, completing this portrait of an economy in recession.

In contrast, demand remains buoyant
Retail sales increased 14.8% yoy in real terms in the first 10 months of the year. Investment is also holding up, as illustrated by a record increase of 17% in the first 9 months of the year. Yet after a very dynamic first half, investment spending has stagnated since Q3 2012.

Zero inflation
Consumer price inflation was zero in October for the third consecutive month, despite the increases in pensions and social benefits, the new wave of reimbursements for deposits lost to hyperinflation in the early 1990s (UAH1000 per deposit) and the 14% annual growth in nominal wages. Although consumption is holding up well, lending refuses to pick up (+2% yoy in nominal terms in September 2012): the banking sector has not yet finished restructuring after the 2009 crisis and the economy is still mired in a deleveraging phase.

By Anna DORBEC

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