Ukraine Macroeconomic Economic Situation

Transcription

1 Ukrae March August Olga Pogarska, Edilber L. L. Segura Real secr data mixed for February 13. Output contraction deepened dustrial secr, construction dependent Real GDP secrs. contracted On 1.1% upside, agriculture 2Q 13, retail same sales rate demonstrated as previous furr gas. quarter. Economic The pace weakness contraction contued dustrial take a ll production on state budget moderated revenues, while 5.7% expenditures June. contued grow at a fast pace. Agriculture dems on surged state budget 15.4% exceeded 1H collected 13 as revenues Ukrae for may first collect a months record high year, harvest. a deficit curred. Consumer State budget prices fiscal fell deficit 0.5% almost February. three Inflation times wider is expected 1H 13 stay than with a year 5-6% earlier. target set forth monetary The gnment authorities. has been considerg fiscal consolidation measures; however, it is seekg ways avoid The expenditure cuts. monetary A furr aggregates crease accelerated direct slightly taxes, February. changes However, transfer so far pricg it has rules, had limited restructurg impact on budget both flation accounts developments payable via issuance bank lendg Treasury activity. bills, etc. are among its itiatives. External Price pressures trade performance rema subdued improved Ukrae February as 13 consumer as export price dex reced while 0.1% imports lower contued June 13. contract, reflectg In June, positively National Bank trade balance. Ukrae decreased its discount rate 25 basis pots 7% pa stimulate Thanks bank lendg. foreign vesrs improvg appetite for risk, Ukrae received sufficient foreign fancg service its external The Hryvnia debt. exchange a result, Hryvnia rate stayed depreciation virtually pressures unchanged contued May-July subside amid March. calmed population dem for foreign exchange extension admistrative restrictions on forex operations. Executive Ukrae Summary enjoyed improvements its external balances first five months 13. However, June Followg Balance an encouragg Payments had start already turned year, February a deficit. between ir ma goals stimulatg saw Gross a furr ternational deterioration reserves fell majority $23.2 billion real secr at end June providg 13, cg sufficient about liquidity 2.6 months bankg dicars, imports. signifyg that Ukrae s economy still remas secr matag foreign exchange rate stability. weak. Executive Industrial Summary output shrank 6% February, Weaker than expected conditions adversely hampered Although select ongog secrs weakness Ukraian external dem economy Ukraian affected budget economy revenue is forecast performance. gradually Revenue rec collections domestic demonstrated vestment. strong Decreased, all production electricity, activity were course up a 2H nomal 13, 5% supported private first consumption months mache remaed buildg, weak oil 2Q refg 13. Slow metallurgy external contributed dem, year. gas At same agriculture time, expenditures a more favorable soared upward base, most a contug decle slide dustry. world Despite commodity relatively prices warm effect. 21% But all period will rema amid a slow strong at about crease 0.5% wear, a subdued construction trend domestic volume dem dipped kept about weighg 15% on social security 13, as re safety is no benefits strong export higher rebound public ahead debt Ukrae s February, mirrorg. a decle Accordg vestment early estimates activity. due a more protracted recession euro zone service payments. a result, state budget ran an early Weaker State dustrial Statistical construction Service performance Ukrae, real weighed GDP slowdown or key tradg partners (e.g., deficit, potg a deterioration fiscal conditions on wholesale contracted trade 1.1% transportation 2Q, turn. same pace as Russia, Turkey). More, new wave trade tensions previous year. Industrial production decled 5.3% with first Russia may months also exert a year. ll on The deficit pace recy ced On a positive January-June note, maly contraction account metallurgy commodity lost new gnment borrowgs, a substantial portion momentum exportg metallurgy February. In chemicals. addition, Output retail reduction sales edged budget which deficit, purchased which almost National three times Bank higher Ukrae. than up Ukrae s 14.8% machery may January-February. be attributed a more This moderate suggests 1H revenue 12. mobilization At same is time, likely re be is challengg a relatively high contug pace solid contug private trade consumption, tensions with Russia. boosted probability near term, that order gnment make up will for request shortage IMF fancg revenue, At a 9.6% same time, crease thanks real domestic wages market protective period. gnment next six has months. itiated Under creases IMF excises program, taxes Agricultural measures output stimulus from creased Ukraian 5.8% gnment Ukrae s import fiscal duties. deficit While should se be efforts sustaed. may help So far, a January-February ( imposition amid a special furr gas duty on animal imported breedg. cars, weak short run, more outlook comprehensive creasg measures volatility susta on external public troduction licensg for imported drugs, extension fancial However, improvements se secrs were sufficient fances markets are required. amid In FED s particular, talks Nafgaz on QE withdrawal remas a preferential electricity tariffs for select ferroalloy may eventually cause adjustment fiscal expenditures plants, fset etc.), more decle substantial dustrial contraction production started dustrial considerable 2H 13. Top drag gnment on fiscal ficials situation have Ukrae, hted that due goods moderate producg June. secr, construction related secrs. revision heavily may subsidized take place natural September gas tariffs for this population year. At a result, economy is likely fall 1Q 13. same heatg time, companies. gnment Although has been Ukraian seekg authorities ways world Construction dem dropped is expected 19% gradually 1H rec 13, affected through avoid have refraed expenditure from cuts. politically Furr creases paful creases direct taxes, tariffs, 13, subdued expansion bank credit exports activity, compounded adverse early with sprg robust changes y seem transfer realize pricg urgency rules, restructurg energy secr budget reform. private wear consumption conditions lower forecasted capital high expenditures agricultural accounts We also expect payable an via extensive issuance budget Treasury revision bills, followg etc. are harvest from should budget. pave Amid way weaknesses for a return construction among end its first itiatives. quarter While 13. se efforts may crease second dustrial half secrs, year. real Real value GDP is cargo projected transportation exp tax proceeds budget, y are likely crease External trade performance improved February about wholesale 2% trade for turn 13. edged down 6% tax burden as well as cost dog busess 10%, respectively, January-June 13. Ukrae. 13, contributg Due current dimishg delays consolidation Hryvnia depreciation measures, The consumer price dex fell 0.5% from a year ago Ukrae s pressures. public Followg secr three deficit months may stay contraction, at around 5% exports February. On upside, Prices consumer contued spendg benefit has mataed from favorable positive GDP rebounded, 13. expg 8.1% February maly on supply momentum, conditions sustaed 12 solid real gnment wage freezg (up account higher yields metallurgical agricultural natural 9.6% gas tariffs 1H 13), for dimishg population. flation At expectations same time, Price products. pressures imports Ukrae contued rema decle subdued (-7.5% as ) persistent a more deflation stable exchange (for rate. fifth This consecutive reflected month) an consumer amid lower price energy dex imports, grew 0.1% monthly mom current May account also 11% a reflection crease weak retail sales turn activity. The January stayed gap unchanged notably lower June. February a result, 13 annual compared terms a June 13. Production agricultural secr surged up monetary dicars strengned February, although year dex ago. Coupled 0.1% with lower successful June compared seign Eurobonds a year 15.4% 1H 13 as Ukrae is expected collect earlier. previous periods, low flation a its a record impact high on price gra development harvest this year. remas In addition, limited. thanks Inflation reflection issuance weak external debt flows activity, good corporate agricultural secr, is several forecast years rema high harvests, with Ukrae s targets animal (4.8%-6.1% breedg harvests this allowed for several Ukrae years not a only row, successfully subdued imported meet its at has been end demonstratg 13). Dimished solid gas. flationary Lookg ahead, Hryvnia flation external fancg amid a downward needs trend absence world IMF commodity fancg depreciation pressures allowed NBU balance but also slightly augment its gross ternational reserves. Copyright SigmaBleyzer, 13. All rights reserved. Chief Economist Edilber L. Segura Edir Ra Bleyzer O Malley 1

2 March August Ukrae Olga Pogarska, Edilber L. L. Segura Real secr data mixed for February 13. Output contraction deepened dustrial secr, construction prices dependent calmed secrs. On Hryvnia upside, depreciation agriculture expectations, retail sales result, demonstrated current furr account gas. deficit almost 36% Economic virtually weakness unchanged contued utility prices. take a ll We on expect state budget price revenues, lower while expenditures period. Over contued first five grow months at a fast pace. pressures dems moderately on state crease budget exceeded comg collected months. revenues for year, Ukrae first generated months a solid year, capital a deficit account curred. surplus The acceleration will likely be result an crease spite large external debt repayments an absence Consumer prices fell 0.5% February. Inflation is expected stay with 5-6% target set forth direct monetary taxes authorities. higher world energy prices. In addition, IMF fancg. Loose ternational liquidity calmed Ukraian gnment may eventually crease population dem for foreign exchange may be The monetary aggregates accelerated slightly February. However, so far it has had limited impact on both natural flation gas developments tariffs population bank lendg its efforts activity. resume prcipal reasons for capital account improvements borrowg from IMF. But all flation will rema period. However, already June, capital account subdued External with trade performance annual rate improved at February about 4% 13 at as export turned a reced small deficit while due imports high contued external public contract, debt reflectg positively on trade balance. end year. repayments, which reflected a decle NBU gross Thanks foreign vesrs improvg appetite for risk, Ukrae ternational received sufficient reserves. foreign fancg service its The external annual debt. a result, Hryvnia monetary depreciation aggregates pressures kept contued subside March. Executive strengng Summary amid National Bank Ukrae s efforts The situation on foreign exchange market remaed Followg stimulate an credit encouragg activity, contug start deposit year, flow February between stable as admistrative ir ma restrictions goals stimulatg on foreign currency bankg secr, moderate monetization public debt saw a furr deterioration majority real secr operations providg a favorable sufficient liquidity external balance bankg positive NBU terventions on terbank forex market. first five months year calmed population dicars, At begng signifyg June, that Ukrae s National economy Bank still Ukrae remas secr dem for matag foreign currency. foreign exchange Turbulent rate ternational stability. weak. decreased Industrial its discount output rate shrank 25 basis 6% pots 7%. February, Weaker fancial than markets, expected low ternational conditions reserves adversely higher hampered ongog weakness external dem affected population budget dem revenue for performance. foreign exchange Revenue followg collections domestic Despite a vestment. challengg Decreased external production environment, electricity, Ukrae s were end up vacation a nomal period 5% may crease Hryvnia first months exchange mache external buildg, balance developments oil refg were metallurgy rar favorable contributed rate year. pressures At same fall time, this expenditures year. sumg soared Ukrae upward most first six months decle 13. dustry. Although Despite export relatively performance warm secures IMF fancg at end year, Ukrae 21% period amid a strong crease wear, weak, construction declg volume almost dipped 6% about US 15% Dollar will be able mata its external stability, although social security safety benefits higher public debt terms, February, imports mirrorg fell even a sharper decle 13.5% vestment, affected activity. higher short-term Hryvnia exchange rate fluctuations service payments. a result, state budget ran an early Weaker gnment dustrial efforts construction reduce energy performance imports. weighed a are likely 2H 13. deficit, potg a deterioration fiscal conditions on wholesale trade transportation turn. first months year. The deficit ced On a positive note, contraction 09 metallurgy lost 10 new gnment 11 borrowgs, 12 a 13f substantial 14f portion momentum DP, % February. In addition, retail sales edged 4.1 which 5.2 purchased 0.2 National 0.5 Bank 3.0 Ukrae. GDP per capita, $ up 14.8% January-February. This suggests revenue 3575 mobilization 3864 is likely 4106 be challengg 4432 Industrial production, % contug solid private consumption, boosted near term, order make up for shortage revenue, Retail sales, % Budget a 9.6% defi cit, % GDP* crease real wages -8.5 period gnment -4.3 has itiated -5.6 creases -5.3 excises -4.0 taxes Agricultural Gnment external output debt, % GDP creased.5 5.8% 23.8 import.4 duties. While 18.3 se efforts 17.0 may help 17.3 January-February Inflation, eop amid furr gas animal 12.3 breedg. 9.1 short run, more 4.6 comprehensive -0.2 measures 4.0 susta 6.0public However, Gross ternational improvements reserves, $ se billion secrs were 26.5 sufficient 34.5 fances are 31.8 required. In 24.5 particular, 23.0 Nafgaz remas 25.0 a Current fset account more balance, substantial % GDP contraction -1.5 dustrial -1.9 considerable -5.5 drag on -8.4 fiscal situation -7.7 Ukrae, -7.5 due goods Gross producg external debt, secr, % GDP construction 88.2 related secrs heavily subsidized 77.2 natural 76.6 gas tariffs 74.7 for population 72.6 * Includg a result, Nafgaz economy Pension fund deficits is likely (not cludg fall bank recapitalization 1Q 13. expenditures VAT refund heatg bonds companies respectively). Although Ukraian authorities Source: State Statistics Committee Ukrae, NBU, Mistry Fance Ukrae, 13 Budget Law, The Bleyzer Foundation world dem is expected gradually rec through have refraed from politically paful creases tariffs, 13, expansion exports compounded with robust y seem realize urgency energy secr reform. private consumption forecasted high agricultural We also expect an extensive budget revision followg harvest should pave way for a return end first quarter 13. second half year. Real GDP is projected exp External trade performance improved February about 2% for , contributg dimishg Hryvnia depreciation The consumer price dex fell 0.5% from a year ago pressures. Followg three months contraction, exports February. Prices contued benefit from favorable rebounded, expg 8.1% February maly on supply conditions 12 gnment freezg account higher yields metallurgical agricultural natural gas tariffs for population. At same time, products. imports contued decle (-7.5% ) persistent deflation (for fifth consecutive month) amid lower energy imports, monthly current account also a reflection weak activity. The gap notably lower February 13 compared a monetary dicars strengned February, although year ago. Coupled with successful seign Eurobonds its impact on price development remas limited. Inflation issuance external debt flows corporate secr, is forecast rema with targets (4.8%-6.1% this allowed Ukrae not only successfully meet its Estimate based on dustrial sales. Housn, TX USA Kyiv Office, Ukrae 4A, Baseyna Street, «Mar Plaza», 8th floor Kyiv 01004, Ukrae kiev.fice@sigmableyzer.com.ua Kharkiv Office, Ukrae Meyt House, 49 Sumska Street, Office 4 Kharkiv 61022, Ukrae kharkov.fice@sigmableyzer.com.ua 2

3 Ukrae Situation March August 13 Olga Pogarska, Edilber L. L. Segura Real secr data mixed for February 13. Output contraction deepened dustrial secr, construction Economic dependent Growth secrs. On upside, agriculture retail sales demonstrated furr gas. Followg Economic encouragg weakness contued signs April, take Ukrae s a ll on state real budget secr revenues, data Real while Secr Performance expenditures Ukrae, contued grow at a fast pace. dems on state budget exceeded collected revenues for % first for May disappotg. While select secrs Ukraian months year, a deficit curred. economy Consumer contued prices fell demonstrate 0.5% strong February., Inflation all is expected stay with 5-6% target 13 set forth monetary authorities. 6m 5m 4m activity weak, affected slow external dem, ongog Agriculture 15,4 5,1 5,1-4,5 17,5-1,5 slide The world commodity monetary aggregates prices accelerated subdued credit slightly. February. In However, so far it has had limited impact on both flation developments bank lendg activity. Industry -5,3-5,2-4,2-1,8 7,6 11,2 addition, a high base for comparison variable holidays 1 also External trade performance improved February 13 as export Construction reced works while imports -19, contued * * -14,0 contract, 11,1-5,4 contributed reflectg positively weaker on trade data balance. period. At same Domestic trade, turn time, Thanks thanks foreign domestic vesrs market improvg protection appetite measures for risk, stimulus Ukrae received Wholesale sufficient trade foreign -6,0 fancg -5,8-4,2 service -4,4 its 0,6 0,4 from external Ukraian debt. a gnment, result, Hryvnia decle depreciation dustrial pressures production contued Retail subside trade March. 11,2 11,6 12,7 15,9 14,7 9,8 started moderate June. Transportation, turn Executive Summary Cargo -10,1-11,4-10,7-7,6 5,7 6,4 Followg The contraction an encouragg dustrial production start deepened year, February 9.3% between Passenger ir ma goals -4,2-3,5 stimulatg -3,4-1,2 3,3-0,2 saw May a maly furr on deterioration account commodity majority exportg real metallurgy secr Communication providg services sufficient -0,5 liquidity 0,5 2,0 1,1 3,1 bankg dicars, chemicals. signifyg ternational that steel Ukrae s fertilizer economy commodity still remas prices kept secr Or Services, matag non-fancial foreign -2,2 exchange -1,6-0,9 rate 0,8 stability. 18,6 2,9 weak. declg, Industrial Ukrae s output production shrank metals 6% chemical February, products went * Revised data Weaker than expected conditions adversely hampered down 11.2% ongog weakness 16.2%, respectively, external dem May. Ukrae s Source: State Statistics Committee Ukrae, The Bleyzer Foundation affected budget revenue performance. Revenue collections domestic manufacturg vestment. transport Decreased vehicles production fell 24.4% electricity, May, which were up a nomal 5% first months mache may be attributed buildg, oil a more refg moderate metallurgy pace contributed contug year. At same World time, Steel expenditures Fertilizer Price soared Indices, upward trade most tensions with decle Russia, dustry. ma Despite destation relatively market for warm Ukrae s exports heavy % 21% period amid a strong crease wear, machery construction transport volume vehicles. dipped At same about time, thanks 15% imposition a special 80 social security safety benefits higher public debt duty February, on imported mirrorg cars, a pace decle decle vestment dustry activity. slowed 10.3% June. 60 service payments. a result, state budget ran an early Weaker dustrial activity construction excess supply performance coal weighed weighed on production electricity, 40 deficit, potg a deterioration fiscal conditions on which wholesale down trade 3.8% transportation 1.5% turn. May June, respectively. first months year. The deficit ced 0 On Construction a positive dropped note, 19% contraction 1H 13, metallurgy affected subdued lost bank new credit gnment activity, borrowgs, a substantial portion - momentum adverse early sprg February. wear In conditions addition, retail lower sales capital edged expenditures which from purchased budget. National Bank Ukrae. -40 up Amid contug 14.8% weaknesses January-February. construction This dustrial suggests secrs, revenue real mobilization value is likely be challengg -60 contug cargo transportation solid wholesale private trade consumption, turn edged boosted down near 6% term, 10% order, make up for shortage revenue, -80 respectively, a 9.6% January-June crease real 13. wages period. gnment has itiated creases excises taxes Agricultural output creased 5.8% import duties. While se efforts World Carbon may Steel Price help Index On upside, despite ongog weakness metallurgy slidg world iron ore January-February amid furr gas animal breedg. short run, more comprehensive measures World Fertilizer Price susta Index prices, extraction iron ores went up a solid 2.7% May 2.4% public However, improvements se secrs were sufficient fances are required. Source: In particular, MEPS June. Ukraian producers may have creased iron ore production anticipation Nafgaz remas a fset higher dem more from substantial Cha contraction amid evidence low dustrial venries considerable re. More, drag on fiscal situation Ukrae, due Industrial Production Index, select branches, goods after a producg temporary secr, slump construction May, pharmaceutical related secrs. dustry resumed heavily subsidized natural gas tariffs for population % June, a result, expg economy 28%. is likely The troduction fall 1Q licensg 13. imported heatg medices companies. Although Ukraian authorities world supported dem dustry s is expected performance gradually while rec May s through drop production have refraed can be from attributed expansion impact exports variable compounded holidays, as with dustry robust is very y labor seem tensive. realize 18urgency energy secr reform. politically Ukraian Industrial paful Production creases Secrs, tariffs, y/y % change 13, private Consumer consumption spendg has also mataed forecasted high positive agricultural momentum, We sustaed also expect solid an extensive 9 budget revision followg harvest real wage should pave (up 9.6% way for a return 1H 13), dimishg flation end expectations first quarter second a more half stable exchange year. Real rate. GDP This projected reflected exp 11.2% crease -9 External trade performance improved February retail about sales 2% turn for 13. period , contributg dimishg Hryvnia depreciation Production agricultural secr surged 15.4% 1H 13 as Ukrae -27 The may consumer collect a record price high dex gra fell harvest 0.5% this from year. a year ago end pressures. July, Ukrae Followg had three months contraction, exports -36 February. harvested almost Prices 27 contued million ns benefit gras, from up favorable 21%. Although rebounded, expg drought 8.1% 12 February maly 13 on supply durg conditions summer months 12 may adversely gnment affect freezg production account summer higher gras, yields Food metallurgical processg Chemicals agricultural Metallurgy Mache-buildg natural it favored gas corn tariffs growg. for Given population. larger At sown same area time, under products. this crop, Ukrae s imports contued Mg decle Coke- (-7.5% oil-refg) persistent harvest deflation corn is expected (for fifth jump consecutive % from month) previous amid year lower at least energy 25 imports, monthly current account Source: State Statistical Service Ukrae, The also million a reflection ns. a result, weak Mistry activity. Agrarian The Policy gap Food notably Ukrae lower February 13 compared a Bleyzer Foundation monetary dicars strengned February, although year ago. Coupled with successful seign Eurobonds its 1 Due impact Easter on holiday price development transfer workg days remas due celebration limited. Labor Inflation Day, re were issuance fewer workg days external May 13 debt than flows last year. corporate secr, is forecast rema with targets (4.8%-6.1% this allowed Ukrae not only successfully meet its Housn, TX USA Kyiv Office, Ukrae 4A, Baseyna Street, «Mar Plaza», 8th floor Kyiv 01004, Ukrae kiev.fice@sigmableyzer.com.ua Kharkiv Office, Ukrae Meyt House, 49 Sumska Street, Office 4 Kharkiv 61022, Ukrae kharkov.fice@sigmableyzer.com.ua 3

4 March August 13 Ukrae Olga Pogarska, Edilber L. L. Segura Real secr data mixed for February 13. Output contraction deepened dustrial secr, construction upgraded dependent its secrs. gra harvest On upside, forecast agriculture about 57 million retail sales ns. demonstrated In addition, furr thanks gas. several years high harvests, Ukrae s Economic animal weakness breedg contued has been take demonstratg a ll state solid budget gas. revenues, while expenditures contued grow at a fast pace. Lookg dems ahead, on Ukraian state budget economy exceeded is forecast collected revenues gradually for rec first months course 2H year, 13. a deficit But all curred. will Consumer rema slow prices at about fell 0.5% 13 February. as re Inflation is no strong is expected export rebound stay with comg 5-6% due a more target protracted set forth recession monetary euro zone authorities. slowdown Ukrae s or key trade partners (e.g., Russia Turkey). More, new The wave trade monetary tensions aggregates with Russia accelerated may exert slightly a ll on February. pace However, recy so far it has Ukraian had limited economy. impact on In both July, Russia flation announced developments it will not extend bank lendg tax activity. free quota for supply Ukraian pipes for 2H 12, troduced a ban on Ukrae s External confectionary trade performance began improved monirg February select 13 dairy as products. export On reced upside, while imports will be contued supported contract, steady creases reflectg positively household on consumption trade balance. good prospects for agricultural exports. Ukrae is projected crease gra shipments Thanks abroad foreign amid vesrs a high improvg harvest this appetite year. In for addition, risk, Ukrae Ukraian received producers sufficient foreign poultry fancg secured service right its supply ir external products debt. a result, European Hryvnia Union, depreciation which came pressures effect contued at end subside July. Fally, March. Ukrae is expected sign an Executive sociated Summary Agreement with EU November this year, which cludes a deep comprehensive free trade area. This will furr support Ukrae s as agreement will Followg an encouragg start year, February between put Ukrae ir ma supply goals cha stimulatg Europe. Although impact Agreement is unlikely be felt short run, it will give strong impetus for development saw foreign a furr trade deterioration will encourage vestments majority real Ukrae. secr Also thanks providg gradual strengng sufficient liquidity foreign trade, bankg this dicars, should underp signifyg Ukrae s that Ukrae s real GDP economy at still about remas 3% secr 14. matag foreign exchange rate stability. weak. Industrial output shrank 6% February, Weaker than expected conditions adversely hampered Fiscal Policy ongog weakness external dem affected budget revenue Monthly performance. State Budget Revenue Execution, not collections domestic The all vestment. fiscal budget Decreased situation production manageable electricity, first half 13, seasonally adjusted maly thanks solid domestic external borrowgs. Neverless, were up Ukrae s a nomal 5% first months mache public fances buildg, rema oil refg under severe metallurgy stra contributed execution year. fiscal At budget same time, 50 expenditures soared upward 6 2H most 13 raises decle concerns. dustry. At Despite same time, relatively re is warm a relatively 21% high probability 40 period amid a strong crease 3 wear, that construction next six months volume dipped gnment about will 15% request IMF social fancg. security Under 30 0 safety benefits higher public debt February, mirrorg a decle vestment activity. -3 IMF program, Ukrae s fiscal deficit should be sustaed. service payments. a result, state budget ran an early 10-6 Weaker dustrial construction performance weighed deficit, potg a deterioration 0 fiscal conditions -9 on In wholesale meantime, trade due weak transportation turn. low flation, first tal state months budget -10 year. The deficit ced -12 revenues fell 0.2% nomal terms 1H 13. This maly result On a positive note, contraction metallurgy lost new gnment borrowgs, - a substantial portion -15 under-performance value added tax collections. Accountg for more than momentum half tal state February. budget revenues, In addition, VAT retail proceeds sales were edged down which a nomal purchased 1.9% National 12 Bank 13Ukrae. Balance, UAH billion, right scale up 14.8% period. In contrast January-February. gross VAT This receipts, suggests VAT refunds revenue kept mobilization growg is likely be challengg Revenues, %, left scale contug solid private consumption, boosted near term, order make up for Expenditures, shortage %, left scale at a robust 19.4% 1H 13, which is surprisg given declg dustrial revenue, activity a 9.6% exports. crease Repayments real wages outstg VAT period. refunds accumulated gnment has itiated Source: Mistry creases Fance, The Bleyzer excises Foundationtaxes Agricultural previous years output may expla creased crease, although 5.8% tax refund fraud import may duties. also be While se efforts may help January-February cause. amid furr gas animal breedg. short run, more comprehensive measures susta public However, improvements se secrs were sufficient fances are required. In particular, Nafgaz remas a Collections fset from more corporate substantial come contraction tax excises dustrial demonstrated considerable drag 6.4% on fiscal 8% situation respectively Ukrae, 1H due goods 13. At producg same secr, time, se construction creases should related be prcipally secrs. attributed heavily subsidized new mechanism natural gas tariffs advance for tax payments population a higher result, rates economy applied sce is likely begng fall 1Q 13. year, respectively. heatg Although companies. Although gnment Ukraian imposed authorities a special duty on imported cars mid-april, proceeds from import duties decled May June due a sharp decle world imports. dem a result, is expected accumulated gradually revenues rec from import through taxes have were refraed just 1% from higher politically than paful correspondg creases period tariffs, 13, last year. Partially, expansion weak exports tax proceeds compounded were fset with robust higher y NBU seem prit realize transfers urgency state budget. energy In secr particular, reform. private NBU transferred consumption UAH 10 billion, forecasted 6.2% high tal agricultural state budget We revenues also expect for an period, extensive which budget is 27.4% revision higher followg than last harvest year. Thus, should revenue pave execution way for data a return period suggests that end full first year quarter revenue target, 13. projected based on ly second optimistic half macro year. Real data, GDP will is not projected be achieved. exp External trade performance improved February about 2% for , contributg dimishg Hryvnia depreciation In contrast revenues, expenditures contued crease at a robust 10.3% 1H 13, despite under-execution The a number consumer budget price programs, dex fell prcipally 0.5% from a year areas ago national pressures. defense, Followg public vestments three months public contraction, admistration. exports February. expenditures Prices rose contued much faster benefit than revenues, from favorable state budget rebounded, deficit expg amounted 8.1% UAH 22.7 billion February ($2.8 maly billion) on supply conditions period, almost 12 three times gnment higher compared freezg a year account before. Solid higher domestic yields external metallurgical borrowgs, agricultural however, natural helped keepg gas tariffs fiscal for situation population. manageable At allowed same time, delayg products. paful consolidation imports contued measures. Weak decle (-7.5% outlook ) persistent creasg deflation volatility (for on external fifth consecutive fancial markets month) amid amid FED s lower talks energy on QE withdrawal imports, may monthly cause current gnment account also revise a reflection fiscal revenue weak expenditure activity. targets The downwards gap comg notably months. lower At same February time, 13 gnment compared has a been monetary seekg dicars ways avoid strengned expenditure February, cuts. although year ago. Coupled with successful seign Eurobonds its impact on price development remas limited. Inflation issuance external debt flows corporate secr, is forecast rema with targets (4.8%-6.1% this allowed Ukrae not only successfully meet its Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Housn, TX USA Kyiv Office, Ukrae 4A, Baseyna Street, «Mar Plaza», 8th floor Kyiv 01004, Ukrae kiev.fice@sigmableyzer.com.ua Kharkiv Office, Ukrae Meyt House, 49 Sumska Street, Office 4 Kharkiv 61022, Ukrae kharkov.fice@sigmableyzer.com.ua 4

5 March August 13 Ukrae Olga Pogarska, Edilber L. L. Segura Real secr data mixed for February 13. Output contraction deepened dustrial secr, construction First, dependent gnment secrs. On announced upside, plans agriculture furr retail crease sales excise demonstrated taxes on furr alcohol, gas. bacco, fuel, etc. Second, at begng July, Ukraian parliament approved amendments Tax Code Ukrae regardg transfer Economic weakness contued take a ll on state budget revenues, while expenditures contued grow at a fast pace. pricg dems (tra-group on transactions). state budget exceeded The new collected rules, effective revenues September for first 1st, provide months for better year, defition a deficit related curred. parties, controlled transactions, clarify procedures transfer pricg methods, etc. In particular, law elimated previous rule Consumer that contract prices prices fell can 0.5% deviate February. up % Inflation from a is market expected price stay troduced with 5-6% a new penalty target regime set forth for violation monetary authorities. general transfer pricg requirements failure comply with reportg requirements tax authorities. The new transfer The rules are monetary generally aggregates based on accelerated OECD guideles slightly February. were necessary However, so reduce far it has tax had evasion limited impact large companies. on both However, flation developments new rules may bank pose lendg significant activity. challenges for both tax authorities busess. In particular, due lack External transition trade performance period, re improved may be sufficient February 13 numbers as export traed tax reced ficers while judges imports contued manage contract, rule on transfer reflectg pricg positively matters. on In trade addition, balance. re is a risk excessive tax terference price settg mechanism. And while Thanks Ukrae foreign is already vesrs considered improvg one appetite most for risk, difficult Ukrae countries received terms sufficient payg foreign taxes fancg 2, new service amendments its external tax legislation debt. may a result, crease Hryvnia tax pressure depreciation pressures costs contued dog busess subside Ukrae. March. Executive Summary Third, July gnment approved a law allowg gnment restructure budget accounts payable accrued Followg as January 1, encouragg 13, cludg start VAT refund year, debt. February The new between T-bills will ir yield up ma 5% goals will stimulatg mature 5 years. saw While a furr ir issuance deterioration will help resolve majority issue real VAT secr refunds will providg reduce budget sufficient pressures liquidity short-run, bankg this dicars, novation signifyg raises concerns that Ukrae s for followg economy reasons. still remas First, despite secr fact matag that law foreign stipulates exchange a voluntary rate stability. prciple weak. for choosg Industrial between output cash shrank or T-bills 6% reimbursement, February, practice Weaker re than may be expected formal pressure conditions choose adversely latter. hampered case ongog VAT bonds, weakness se securities external are dem likely be traded affected on budget secondary revenue market performance. with a large Revenue discount, collections which domestic would mean vestment. lower workg Decreased capital production for busess. electricity, Second, fact, law allows for creation functiong a quasimoney strument, buildg, oil whose refg issuance metallurgy will be controlled contributed Mistry Fance Ukrae. This may crease cost were up a nomal 5% first months mache year. At same time, expenditures soared upward transactions most decle uncertaty dustry. Despite economy. relatively Third, warm it may cause an crease Ukrae s public debt unsustaable 21% period amid a strong crease wear, levels. construction volume dipped about 15% social security safety benefits higher public debt February, mirrorg a decle vestment activity. Fally, Mistry Fance has developed amendments service tax payments. system Ukrae. a result, In particular, state budget it has ran proposed an early Weaker reduce dustrial VAT rate construction from current performance 19% (17% weighed sce deficit, begng potg 14) a deterioration 9% troduce fiscal a conditions 1-2% sales tax. on While wholesale this reform trade may transportation crease tax proceeds turn. budget, it will first crease months tax burden year. as well The deficit as cost ced dog On busess a positive Ukrae. note, contraction metallurgy lost new gnment borrowgs, a substantial portion momentum February. In addition, retail sales edged which purchased National Bank Ukrae. up All se 14.8% itiatives dicate January-February. that gnment This suggests realizes growg revenue mobilization fiscal challenges is likely has been challengg seekg ways contug reduce budget solid pressures, prcipally private consumption, relyg on raisg boosted tax revenues. near term, At order same time, make ternational up for shortage experience revenue, shows that fiscal consolidation is more effective if it is based on expenditure cuts. More, some above itiatives are unlikely a 9.6% comply crease with IMF real requirements. wages Hence, we period. believe a combation gnment has revenue-raisg itiated creases expenditure-cuttg excises taxes Agricultural measures will output be used susta creased Ukrae s 5.8% public fances. However, import due duties. current While delays se efforts consolidation may help measures, January-February Ukrae s public secr amid deficit furr may gas stay around animal 5% breedg. GDP short 13. run, more comprehensive measures susta public However, improvements se secrs were sufficient fances are required. In particular, Nafgaz remas a Monetary fset Policy more substantial contraction dustrial considerable drag on fiscal situation Ukrae, due Price pressures Ukrae rema subdued as consumer goods producg secr, construction related secrs. price heavily dex subsidized grew Consumer Price Index Select Components, % natural gas tariffs for population 0.1% mom May remaed unchanged June. a result, annual terms a result, dex economy 0.1% lower is likely June fall compared 1Q 13. previous year. heatg companies. Although Ukraian authorities 24 world dem is expected gradually rec through have refraed from politically 21 previous periods, low flation a reflection weak activity, good paful creases tariffs, 18 13, agricultural expansion harvests for exports several years compounded a row, with subdued robust imported y flation seem realize amid 15 urgency energy secr reform. private consumption forecasted high agricultural We also expect an extensive 12 a downward trend world commodity prices calmed Hryvnia depreciation budget revision followg 9 harvest expectations, should pave virtually way unchanged for a return utility prices. In particular, end food first prices quarter second sod almost half 2% below year. ir Real June GDP 12 is projected level with fruit, exp vegetables, milk 3 External trade performance 0 improved February dairy about products 2% contributg for 13. most decle. The rates price change for -3 13, contributg -6 clothg footwear household equipment remaed unchanged at -2.8% dimishg Hryvnia depreciation The consumer -2.1% price May dex fell June, 0.5% respectively. from a year The ago prices for pressures. se commodity Followg three months 12 contraction, 13 exports February. Prices contued benefit from favorable rebounded, expg CPI 8.1% Foods Housg February Utilities maly Fuels groups are dependent Hryvnia exchange rate developments due high on supply share conditions imports. In 12 addition, a deflation gnment se freezg groups may account be attributed higher yields metallurgical agricultural Source: State Statistical Service Ukrae, The natural stronger gas summer tariffs sales for than population. a year ago. Thanks At same fallg time, world products. crude oil prices, imports Bleyzer contued Foundation decle (-7.5% ) persistent domestic fuel deflation prices (for decled fifth almost consecutive 1% month) June. Due amid lower gnment energy imports, monthly current account also reluctance a reflection raise natural weak gas prices activity. population, The utility gap prices notably remaed lower February 13 compared a stable monetary at 0.3% dicars strengned May-June. February, although year ago. Coupled with successful seign Eurobonds its 2 Although impact Ukrae s on price rankg development payg taxes remas World Bank Dog limited. Busess Inflation 13 report improved issuance 18 pots, it external still held 165th debt position flows out 185 countries.. corporate secr, is forecast rema with targets (4.8%-6.1% this allowed Ukrae not only successfully meet its Housn, TX USA Kyiv Office, Ukrae 4A, Baseyna Street, «Mar Plaza», 8th floor Kyiv 01004, Ukrae kiev.fice@sigmableyzer.com.ua Kharkiv Office, Ukrae Meyt House, 49 Sumska Street, Office 4 Kharkiv 61022, Ukrae kharkov.fice@sigmableyzer.com.ua 5

6 March August 13 Ukrae Olga Pogarska, Edilber L. L. Segura Real secr data mixed for February 13. Output contraction deepened dustrial secr, construction Lookg dependent ahead, secrs. we expect On price upside, pressures agriculture moderately retail sales crease demonstrated comg furr gas. Select Monetary Indicars, months but all flation will rema subdued with annual rate % Economic weakness contued take a ll on state budget revenues, while expenditures contued grow at a fast pace. stg dems at about on 4% state budget at exceeded end collected year. revenues The acceleration for first will be months 32 year, a deficit curred. result a likely crease direct taxes (excises on fuel, alcohol bacco) 28 Consumer higher world prices energy fell 0.5% prices (already February. June, Inflation crude is oil expected prices started stay with rise, 5-6% target set forth monetary authorities. 24 Sck respondg tensifyg tensions Middle East). In addition, Ukraian deposits gnment The may monetary eventually aggregates crease accelerated natural gas slightly tariffs February. population However, so its far it has had limited impact on both Money flation developments bank lendg activity. 16 efforts resume borrowg from IMF. Forecast flation, however, will be supply 12 second External lowest trade performance decade. improved February 13 as export reced while imports contued contract, reflectg positively on trade balance. 8 The Thanks annual foreign vesrs monetary improvg aggregates appetite kept for strengng risk, Ukrae amid received National sufficient foreign 4 fancg service its Bank external Ukrae s debt. a efforts result, Hryvnia stimulate depreciation credit activity, pressures contug contued deposit subside flow Credit sck March. 0 bankg secr, moderate monetization public debt positive NBU -4 Executive terventions Summary on terbank forex market. In particular, bankg secr liquidity Followg remaed loose an encouragg May-June, start despite creased year, February NBU sterilization between operations. ir ma goals stimulatg saw Indeed, a furr daily deterioration cash balances on commercial majority bank real correspondent secr accounts providg sod sufficient Source: NBU, The Bleyzer liquidity Foundation bankg dicars, about UAH signifyg 25.5 billion that Ukrae s on average economy May still remas June, almost secr 10% higher matag than foreign exchange rate stability. weak. previous Industrial output months. shrank Excludg 6% short February, period at begng May, Select Interest Rate Trends Ukrae night credit for Hryvnia resources on terbank money Weaker market than sod expected at conditions adversely hampered ongog weakness external dem 30 8,00 2-4% pa, also dicatg market had ample liquidity. affected budget revenue performance. Revenue collections domestic vestment. Decreased production electricity, were up a nomal 5% 25 first months 7,75 mache In addition, buildg, at oil begng refg June, metallurgy National contributed Bank Ukrae decreased year. At same time, expenditures soared upward its discount most rate decle 25 basis dustry. pots Despite 7%. relatively By this move, warm monetary authority 7,50 aimed stimulate bank lendg private secr, which has 21% remaed weak period amid a strong crease wear, construction volume dipped about 15% 15 7,25 so far. The sck bank credit had grown a moderate 4.8% social security as end safety benefits higher public debt February, mirrorg a decle vestment activity. 10 7,00 June 13. To a notable extent, weak credit activity is attributed service payments. commercial a result, state budget ran an early Weaker banks unwillgness dustrial construction lend amid high performance credit risks weighed Ukrae, deficit, on potg one h, a deterioration 5 fiscal conditions 6,75 on wholesale low dem trade for loans transportation from private turn. secr due high credit first rates months strict year. The deficit ced On lendg a positive stards, note, on or contraction h. Abundant metallurgy liquidity lost may spire new gnment commercial Interest Rate on Hryvnia Loans Corporates borrowgs, a substantial portion Interest Rate on Hryvnia Loans Households banks sten ir lendg requirements reduce lendg momentum February. In addition, retail sales edged which rates, which purchased will Interest National Rate Hryvnia Bank Term Deposits Ukrae. make bank credit affordable for corporate enterprises households. NBU Discount Rate, right scale up 14.8% January-February. This suggests revenue mobilization is likely be challengg contug The solid deposits creased private 21.5% consumption, May boosted slightly near moderated term, order.9% make up for shortage revenue, Source: NBU, The Bleyzer Foundation a 9.6% June. The crease deceleration real occurred wages maly on account period. deposits gnment held nonfancial corporations has itiated creases excises taxes Agricultural output may creased be attributed 5.8% higher liquidity preferences import duties. amid While se efforts may help declg deposit rates. At same time, household January-February amid furr gas animal breedg. short run, deposits more showed comprehensive furr improvement, measures susta expg public 21% June. Contug NBU purchases gnment securities, amount UAH 5.3 billion ($0.7 billion) However, May-June, improvements also contributed se secrs money were creation sufficient period. fances are required. In particular, Nafgaz remas a fset more substantial contraction dustrial considerable drag on fiscal situation Ukrae, due goods Fally, producg durg May secr, June construction National Bank related secrs. Ukrae seized heavily opportunity subsidized natural a calmed gas tariffs foreign for exchange population market a carried result, out purchase economy terventions. is likely fall The Bank 1Q 13. bought about $0.5 heatg billion companies. se Although months Ukraian sten authorities decle world gross ternational dem is expected reserves caused gradually large rec external through public debt have repayments refraed from June. politically Indeed, gross paful ternational creases reserves tariffs, 13, decreased expansion $23.2 billion exports as compounded end June, with cg robust 2.6 y months seem imports. realize Partially, urgency decle energy secr reserves reform. may private be attributed consumption revaluation adjustments forecasted (due high agricultural June s drop We gold also prices, expect fluctuation an extensive Euro/US budget revision Dollar exchange followg rate), harvest which may should be temporary. pave way However, for a return given recently creased end volatility first on foreign quarter capital 13. markets amid Ukrae s high second external half fancg needs, year. Real decle GDP is projected reserves may exp contue comg months. In addition, ternational reserves External trade performance improved February below about 2% three months for 13. import c are adversely affectg vesr sentiment, which may furr complicate roll Ukrae s external debt, narrow room absorb 13, adverse contributg domestic /or dimishg external shocks. Hryvnia depreciation The consumer price dex fell 0.5% from a year ago pressures. Followg three months contraction, exports February. So far, Prices situation contued foreign benefit exchange from market favorable has remaed rebounded, stable expg as admistrative 8.1% restrictions February on maly foreign on supply currency conditions operations 12 favorable gnment external balance freezg first account five months higher yields year calmed metallurgical population agricultural dem for natural foreign gas currency. tariffs Thus, for population. mid-may At NBU same extended time, products. mary requirement imports contued sell 50% decle export (-7.5% earngs ) on persistent terbank deflation forex (for market. In fifth addition, consecutive document month) requirements amid lower purchase/sell energy imports, foreign currency monthly seasonally current account weak dem durg summer months may have contributed also a reflection weak activity. The gap lower population notably lower transactions February with foreign 13 exchange. compared a result, net population forex purchases stayed positive for three months a row May-July. An anticipated worseng Ukrae s monetary Balance dicars Payments strengned fall February, amid turbulent although ternational year ago. fancial Coupled markets, with successful low ternational seign reserves Eurobonds its higher impact population on price dem development for foreign remas exchange limited. followg Inflation issuance end vacation external period debt may flows crease Hryvnia corporate exchange secr, is forecast rema with targets (4.8%-6.1% this allowed Ukrae not only successfully meet its Housn, TX USA Kyiv Office, Ukrae 4A, Baseyna Street, «Mar Plaza», 8th floor Kyiv 01004, Ukrae kiev.fice@sigmableyzer.com.ua Kharkiv Office, Ukrae Meyt House, 49 Sumska Street, Office 4 Kharkiv 61022, Ukrae kharkov.fice@sigmableyzer.com.ua 65