DEVELOPMENT TRENDS, INFLUENCE FACTORS, FORECAST MACROINDICATORS OF UKRAINE S ECONOMY FOR THE PERION UNTIL 1015

Transcription

1 UKRAINE COUNTRY REPORT: DEVELOPMENT TRENDS, INFLUENCE FACTORS, FORECAST MACROINDICATORS OF UKRAINE S ECONOMY FOR THE PERION UNTIL 1015 New York, October 22-24, 2012 Valeriy Heyets, Maria Skrypnychenko Institute for Economics and Forecasting, Ukrainian National Academy of Sciences I. Recent Trends In the first half of 2012, Ukraine s economy showed relatively low rates of economic dynamics, together with a full timely repayment of its foreign and domestic debt liabilities, a stable exchange rate, successful holding of the UEFA Euro Cup 2012, and well coordinated of all power branches. Thus, the growth of Ukraine s GDP, according to preliminary data, in August 2012, decreased to 1.5% (as compared to 2% in the first seven months, and 2.5% - in the first six months). The slower GDP growth was a result of the recession in a number of countries and reduction of the world commodity market and capital markets. Additional negative impact on Ukraine s economy is due to the expensive energy materials and the need to repay previously borrowed large loans. A stable growth was registered in mining (+3.2%), a high dynamics is kept in retailing whose turnover grew by 16%. At the same time, in a number of sectors, a much worse performance is observed. Of special concern is the construction, where the output declined by 8%. The industrial output in the first half of 2012, as compared to corresponding period of 2011, increased by a mere 0.4%. Industrial output in mining grew by 2.7%, in the generation and distribution of electricity, gas and water - by 4.2%, and in manufacturing decreased by 1.0% (with the export oriented sectors in the lead of the decline). Industrial output in machine building during January-June of 2012, increased by 0.3%, metallurgy output decreased by 1.5%, chemical and petrochemical industries expanded by 10.0%, food processing by 1.2%, light industry dropped by 9.9%, wholesales turnover slightly decreased by 0.1%, while, at the same time, the retail turnover grew by 16.0%. In June 2012, deflation retained its hold (with CPI at 99.7%, and 100.1% from the beginning of 2012) due to the excessive supply of food items (price drop by 6.4%) and lower fuel prices (by 2.5%), with producers price index in the industry at 100.7% in June 2012, and 105.7% from the beginning of Real revenues of the Consolidated Budget in the first half of 2012, as compared to corresponding period of 2011, grew by 16.0% and those of the State Budget by 15.5%. In the structure of revenues of the Consolidated Budget, the biggest share is accounted for by taxes 84.4% of total revenues (in previous year %). The share of VAT in total revenues amounts to 32.4% (in previous year %), the share of income tax 15.3% (in previous year 15.6%), the share of corporate tax % (in previous year 14.4%). Official exchange rate of the hryvnia to the US dollar, as of , amounted to UAH per one USD. From the beginning of 2012, there has been observed a slight depreciation of the hryvnia to the dollar (by 0.04%). As of , official exchange rate of the hryvnia to euro amounted to Hrn per one euro. From the beginning of 2012, the hryvnia has somewhat consolidated against the euro (by 4.66%). During January-July of 2012, money supply increased by 5.2% (in previous year - by 9.9%), and cash in circulation - by 4.6% (in previous year - by 6.0%), monetary base increased by 2.1% (in 1

2 previous year - by 4.5%). The share of cash in total money supply, as of late July 2012, amounted to 27.9% as compared to 28.1% as of late 2011, which as a share of monetary base amounted to 82.2% against 80.3% as of late Monetization level of the national economy, as of late July 2012, amounted to 46.9% (in previous year %). From the beginning of 2012, total credits granted decreased by 0.3%, including in foreign currency - by 5.4% and increased in national currency (by 3.2%). During January-July 2012, agricultural output in all categories of enterprises decreased by 4.2% relative to similar period of previous year mainly due to the reduction of grain crops by 20%. In the first quarter of 2012 the volume of investments in fixed capital by Ukrainian institutions and organizations increased by 23.2% compared with the first quarter of As compared to the 1 st half of 2011 p. exports of goods and services have grown by 2%, imports - by 7% (negative foreign trade balance amounted to $ million), and exports of goods increased by 2.7%, imports - by 6.6% (negative foreign trade balance amounted to 7216 mln USD). In January- June 2012, the ratio of commodity export coverage amounted to 0.82 (previous year ). Ukraine carried out foreign commodity transactions with partners from 209 countries. The biggest volumes of exports were delivered to the Russian Federation (26.1% of total exports), to Egypt (4.1%), Poland (4%), Kazakhstan (3.9%), India (3.5%) and Italy (3.5%). The biggest shares of Ukraine s imports are accounted from the Russian Federation (33.3% of total), China (8.2%), Germany (8.1%), Belarus (6.1%), United States (4%), Poland (3 9%) and Italy (2.7%). Total FDI in Ukraine, since early this year, has grown by 4.7%, and, as 1 July 2012, amounts to 52,426.7 mln. USD, which equals to USD per one Ukrainian citizen. EU countries are accumulated 78.8% of total investments, CIS - 7, 9%, other countries %. During January-July 2012, as compared to similar period of previous year, real wages grew by 15.5% Real wages in January-July 2012 compared to the same period last year increased by 15.5%, while the rate of registered unemployment, as of August 1, 2012, was 1.6% of able bodied population. II. National Policy Assumption and International Environment Change in the foreign demand. During , the world economy, by the estimates of international experts, will undergo permanent crisis phenomena, first of all, due to the crisis in euro zone, which, through the mechanism of slowing down of the world markets, and worsening price conditions of trade, will create serious obstacles to the stabilization of Ukraine s economic development. In the group of highly developed countries, GDP growth, in 2012, against the background of the European recession, according to IMF estimates, will amount to 1.4% with a negative GDP dynamics in the euro zone (estimated 0.3%). The expected developments will cause a more instable foreign demand for domestic products, in particular, for metals and food products (about 30% of Ukrainian exports is accounted for by the European countries), and will complicate the access of Ukrainian producers to foreign financing. In 2013, we expect a certain revival of the global GDP (to 3.9%, as compared to 3.5% expected in 2012), due to some improvement of the economic situation in the EC. In , the macroeconomic dynamics of the developing countries is expected to be lower than in previous years (GDP growth rates will amount to %, by IMF estimates). The expected worsening of economic dynamics in those countries is due to the exhaustion of idle capacities under the conditions when efficient support of economic growth requires considerable investments, while capital inflow in those countries is lower than before the crisis. 2

3 In the second half of 2012, the price conjuncture on those world markets, which are the most important for Ukraine, will remain unfavorable for Ukrainian exports. Due to further slow down of the world economic development, this year we expect a declining trend of the prices for raw materials and metals, which is a consequences of the loss of confidence and stronger negative business expectations of the market participants as to the prospects of revival in the developed economies, as well as their limited access to credit resources on the financial markets. The level of average annual prices on natural gas will depend on the other hand, on the agreements between the leaders of Ukraine and Russia on the format of cooperation in the energy sphere, and, on the other hand, will be affected by the expected price decrease on the world oil market, in conditions of stronger measures towards the increase of production efficiency and lower demand for energy materials on the part of the developed countries. In , we expect lower stock market prices for oil (by %), which may partly neutralize the tendency to more expensive natural gas. At the same time, the supply of energy materials will be still affected by the rapid growth of the demand on the part of the leading Asian countries. In the context of the aggravation, in the second half of 2012, of crisis phenomena in the euro zone, and under the influence, of the ongoing debt crisis, we expect even stronger financial and economic instability and fluctuations of the exchange rates of the US dollar and euro in the short run. The lack of efficient mechanisms for anti-crisis regulation on the global level, and the poorly coordinated exchange rate policies conducted by the participants of the world financial markets, all increase the uncertainty of development prospects of the world economy, first of all, in the European countries, which, together with the reduction of foreign demand for Ukrainian goods, is worsening the business environment for this country s producers. III. Forecast Summary The weak foreign demand, that caused the decline of the world prices for raw materials became one of the main reasons of the worsening of business activities and economic dynamics in Ukraine in the current (2012) year. In the first half year, the growth rates of Ukrainian GDP decreased to 2% (to corresponding period of 2011, by preliminary estimates and in the industry - to 0.4%. Economic growth during that period, was greatly conditioned by the state support of domestic demand at the expense of higher budget expenditures on social programs, which, against the background of low inflation, caused an increase in people s incomes and a corresponding growth of consumption (according to statistics, the index of real wages, during January-June of 2012, amounted to 115.6%, as compared to corresponding period of 2011). In 2012, we expect an economic growth at 0,7 2,0% of GDP (as compared to 5.2% last year) unless a critical reduction of foreign demand takes place (Table) Worsening of the conditions of foreign trade(as compared to 2011), first of all, stabilization and decrease in the metal prices, slow growth of the prices for chemicals and cereals, and retained high prices on imported natural gas and oil products (on the domestic market) together with the expected appreciation of transport services against the background of insufficient volumes of bank crediting and increased political tensions in the year of parliamentary election will restrain economic growth in 2012, causing an unstable output dynamics of Ukraine s export oriented sectors, in particular, metallurgy and machine building. 3

4 Table Dynamics of the macroindicators of Ukraine s economy in Change in real macro-indicators: (average for period) GDP, % -12,1 5,2 12,1 2,7 7,3 7,9 2,3-14,8 4,1 5,2 0,7 2,0 3,2 4,2 3,6 4,4 Final consumption expenditure - government consumption, % -7,9 1,9 1,7 2,3 4,0 1,8 1,1-2,4 4,0-2,4 1,6 2,1 2,1 2,4 1,9 2,3 Final consumption expenditure - private -1,6 2,5 13,0 20,1 15,9 17,2 13,1-14,9 7,1 15,0 7,2 8,0 5,2 6,4 6,8 7,8 consumption, % Gross fixed investment, % -19,5 12,4 20,4 3,9 20,9 24,4-1,26-50,5 3,9 10,1 2,8 4,0 5,4 6,4 7,1 8,1 Consumer price index, year average, % December to December, % Producers' price index, year average, % December to December, % Exchange rate, average for period, Hrn/$ Prices and exchange rate: 28,2 9,0 13,5 9,1 12,8 25,2 15,9 9,4 8,0 1,1 1,6 5,8 6,8 6,1 7,0 281,7 25,8 12,3 10,3 11,6 16,6 22,3 12,3 9,1 4,6 3,2 3,7 6,7 7,7 20,9 20,5 16,7 9,6 19,5 35,5 6,5 20,9 18,9 4,4 5,2 9,3 10,1 8,1 9,1 272,1 20,8 24,1 9,5 14,1 23,3 23,0 14,3 18,7 14,2 6,4 7,0 8,0 8,8 1,87 5,44 5,31 5,12 5,05 5,05 5,27 7,9 7,94 7,97 8,0 8,15 8,35 8,5 8,7-9,0 4

5 Money aggregates: Monetary base, % 54,2 54,2 34,2 53,9 17,5 46,0 31,6 4,4 15,8 6,3 8,2 10,2 10,5 12,5 11,0 13,0 Money supply (М3), % 35,1 54,3 32,1 54,4 34,5 51,7 30,2-5,5 22,7 14,7 9,5 11,5 13,0 16,0 14,0 17,0 Budget: Total revenues, % to GDP 37,1 28,9 26,5 30,4 31,6 30,5 31,4 29,9 29,1 30,3 30,2 31,2 29,8 31,0 28,4 29,8 Total expenditures, % to GDP 41,9 28,3 29,7 32,1 32,3 31,4 32,6 33,7 34,9 31,7 31,5 33,0 31,4 32,8 29,8 31,0 Balance, % to GDP -4,8 0,6-3,2-1,8-0,7-1,1-1,5-4,1-6,0-1,8-2,0 (-2,6) -1,6 (-1,8) -1,4 (-1,2) Social indicators: Real average monthly wages, % -10,6-0,9 23,8 20,3 18,3 12,5 6,3-9,2 10,2 8,7 9,5 11,5 8,2 9,2 5,0 5,1 Real unemployment rate (ILO), % 11,6 9,2 7,8 7,4 6,9 6,9 9,6 8,8 8,2 7,2 7,5 7,1 7,4 7,0 7,3 Foreign trade: Exports of goods and services, bill $US 18,178 41,290 44,378 50,239 64,001 85,612 54,253 69,26 88,75 91,1 92,5 97,2 98,5 108,3 110,7 Exports of goods 14,572 33,432 35,024 38,949 49,840 67,717 40,394 52,19 69,48 70,7 71,2 76,1 77,5 88,7 90,2 Imports of goods and services, bill $US 15,107 36,310 43,707 53,307 72,153 99,962 56,206 73,24 97,96 104,1 106,2 113,4 115,7 125,1 127,6 Imports of goods 13,956 29,691 36,159 44,144 60,413 83,808 44,701 60,58 83,32 89,4 91,8 97,5 99,2 108,5 110,2 Balance of foreign trade bill $US 3,071 4,980 0,671-3,068-8,152-14,350-1,953-3,98-9,21-13,0 (-13,7) -16,2 (-17,2) -16,8 (-16,9) Balance of goods 0,617 3,740-1,132-5,194-10,57-16,091-4,307-8,39-13,83-18,7 (-20,6) -21,4 (-21,7) -19,8 (-20,0) 5

6 On retention of the existing level o foreign and domestic demand, in 2012we expect a slack dynamics of industrial output (at %). At the same time, one can expect a retention of the comparatively high growth rates of transport and trade resulting from the investments related to the UEFA Euro 2012, and higher retail turnover. At the same time, for Ukraine, which most of the European countries suffered from the crisis, an important factor of the revival of domestic demand (in medium term) should become encouragement of the revival of investment demand and resumption, on that basis, of the development of the real sector With a simultaneous improvement of the structure of the production. It is well known that, in 2011, a considerable factor of economic revival became the active growth of investment, especially public, directed, first of all, on the development of transport infrastructure (as part of the preparation for UEFA Euro 2012) and energy generation. In , we expect a moderate investment activities companies due to the decline of the public part of investments due to the increased budget expenditures on debt servicing, insufficient credit activities of the banks and reduction of the possibilities of borrowing abroad against the background of the global tendency of increased financial risks and capital outflow from the developing markets with its redistribution to the developed economies. Taking into account the fact that in 2011, increased commodity output and revival of investment activities in the Russian Federation contributed to the revival of output and increased exports of Ukraine s machine building produce (freight cars by 63.4%, locomotives 50.6%, and agricultural machinery by 16.2% to previous year) we consider a continued action of that factor to be possible in the years to come (under certain conditions). On the whole, the rates of exports of Ukrainian goods to the CIS countries (39.7% in 2011 as compared to 33.4% to the European countries) were the greatest as compared to other Ukraine s trade partners. In the years to come, we predict a revival of foreign demand for Ukrainian investment goods in the CIS and Asian countries, which will become an important factor for the development of Ukraine s manufacturing. The rate of inflation, as of late 2011, amounted to 4.6% (December to December) or 8.1% in average annual terms, which is the lowest value of consumer inflation during the period of market reforms in Ukraine (except for 2002, characterized by a negative inflation, which was a negative incentive for the economic agent s activities). An essential decrease of CPI in last (2011) year is a result of the following factors: first, a negative dynamics of the world prices for metals and basic commodities, beginning with the second half of the year 2011, second, inflation was reduced by the high supply of food items on Ukraine s domestic market due to the big harvest of cereals, legumes and vegetables ( in 2011, in Ukraine, a record high harvest of cereals was gathered (56.7 mln tons); Third, the low volatility of the exchange rate of the hryvnia to the US dollar, against the background of the trend to weaker dollar on the world exchange markets (the trend emerged in the first half year of 2011); Forth, moderate dynamics of the regulated tariffs on electricity, gas and hot water supply, although their rise had been stipulated as a condition of further cooperation with the IMF. On the whole, during 2011, the tariffs on pubic utilities increased by 11%, which was considerably lower than had been predicted previously. In 2012, the tendency to slower consumer inflation has held on: the price index, during the first half of 2012, according to statistics, has been -0.1% (June 2012 to December 2011) and 1.2% (January-June 2012 in average to similar period of 2011). 6

7 That was caused by the restraining effect of the reduced foreign demand, as well as the influence of the big harvest of 2011 the low increase of administratively regulated prices and tariffs in the year of parliamentary election. For the whole year, one can expect a retention of the moderate consumer inflation at % (December to December) or at % (as annual average) due to the prolonged reduction foreign demand and expected slow down of price dynamics on the world commodity markets due to the recession in the world economy, as well as due to the policy of restricted money supply on the part of the NBU. In 2013, we predict a marked increased of consumer inflation to % (December to December) or to % (as annual average) due to the need to raise the tariffs on public utilities And the much lesser harvest of the main crops in 2012 due to the abnormal cold periods in the beginning of the year and too high temperatures with drought in summer (a one third decrease in cereal yield in comparison with previous year is expected). In the medium run, we predict a price index within % (as year average), which will be contributed by stronger competition between the producers on the consumer market, with the expected decrease in monopolistic character on the Ukrainian markets and anti-inflation stance with the coordination between fiscal and monetary policies. As to the industrial producers prices, one should point out that, while their rates considerably slowed in the forth quarter of 2011, in conditions of lower world prices for Ukraine s export commodities (metal, coke, electricity) for the whole year of 2011, they remained high in annual terms (18.9%). In the medium run, we expect, a decrease in the producers prices (to % as annual average in ) under the influence, lower expenditures on the production, in conditions of the expected introduction of new, in particular, energy saving technologies, forecast decrease of the tax burden on the real sector as a result of economic reforms and measures to revive the agricultural production, including the expected expansion of state support in this sphere). The government s measures to encourage economic growth will lay a foundation for overcoming the protracted disproportion between the changes in producers prices and consumer inflation, which will contribute to lowering the inflation pressure on the economy. Due to the retained instability, on the world markets, in the short run, we expect a weak growth of the inflow of foreign direct investments to Ukraine (at bln USD in 2013 as compared to the expected 6.1% (in 2012)). In 2013, one can expect a speed up of economic growth in Ukraine due to possible revival of the world economy and international trade, in conditions of some improvement of the situation on the world financial markets and a certain expansion of foreign demand for Ukrainian exports. Combined with the revival of private and public investment and gradual increase in bank crediting, it will create conditions for an increase in Ukraine s GDP, in 2013, by %, And, in , by % as annual average (in the optimistic scenario). In perspective, we predict an increase in the rates of gross generation of fixed capital at % in 2013 and by % as annual average in , providing a successful implementation of public investment and infrastructure programs and large scale investment projects in the sphere of infrastructural, residential and transport construction creation of trunk communications etc. The above mentioned developments would make it possible to shape the conditions for the expansion of building capacities and economic output. Simultaneously with retraining 7

8 both in the construction itself, and in the sphere of construction design, such measures should lay foundations for launching an investment process In the medium and long run, along the priority guidelines of structural and innovative reforms which corresponds to the requirements to solve the key task of the investment policy, increasing the structure level of gross capital formation in GDP to 30%. In the medium run, on the condition of possible revival of the demand for Ukrainian goods on the world markets, we predict a rate of goods and services exports at 8.4% in 2013 and 10.8% as annual average in (as compared to the expected 3.8% in 2012). Due to the unstable conditions of foreign trade and the excess of the raw material component in Ukrainian goods exports, we expect in the short run, a retention of the excess of exports rates over exports, which has been observed during 7 recent years. Such a tendency is caused by the greatly limited output possibilities of the raw material sectors and those with low procession level, due to the reduced external demand. At the same time, we predict that, in , the gap between imports and exports will decline, in particular, due to the government measures aimed at the development of import substitution and expansion of domestic production, including within the adopted in late2011state program of the development of domestic production in Ukraine. On such conditions, the forecast estimates of the dynamics of goods and services imports amounts to 9.0% in 2013 and 10.3% as annual average in (as compared to 5.1% in 2012). On the whole, in the medium run on the labor market, we predict a small increase in employment with possible shortage of skilled personnel, as well as a slights revival of migration with positive balance retained. The rate of unemployment will be affected, on the one hand, by improved economic situation in Ukraine (l), lowering the unemployment and, on the other hand, revival of the modernization of fixed assets, a speed up of the administrative reform, reforms of higher school and health care, tight restrictions in the budget sphere, and increase in the pension age (will raise the unemployment) On the whole, we expect a slight reduction of unemployment from % by the ILO methodology, in 2012 to 7.0 7,.3% in In the budget sphere, in 2013, the government policy will be directed to the improvement of the balance of public finance with a moderate deficit of the consolidated budget attained at -1.6 (-1.8). Compliance of that requirement would make it possible to ensure the transition to active encouragement of economic development, including through a gradual easing of the tax burden on the production. With the volatile conjuncture on the world markets and limited financial resources, the main task of the budget policy becomes reducing the budget deficit and the public debt and supporting the economic growth. As regards monetary policy, the NBU plans to realize, In the medium run, a flexible monetary policy oriented to the solution of such tasks as raising the money supply in order to revive the economic dynamics and providing the economy, first of all, the real sector, with the means of payment, restricting inflation/devaluation by regulating the level of liquidity, maintaining the stability of the financial system by Issue and mobilization of funds on the credit and exchange markets, lowering the velocity of money turnover through their redirection from turnover to production. Thanks to The monetary measures aimed at raising the level of monetization of the economy in order to ensure its post-crisis revival and growth. Monetary base, in , will increase by % (December to December) money supply (М3) by %. 8

9 We predict a gradual decrease in the interest rates on credits against the background of the expansion of the banks resource base and lowering the interest rates on deposits and the NBU discount rate. Average weighted rate on the credits granted by the commercial banks (in Hrn), in 2013, will have a trend to decrease (on average by %). As a result, crediting of companies and individuals will increase against the background of the expansion of deposits of legal and physical entities. It is important that the priority object of bank crediting be the real sector (unlike the pre-crisis situation, when, first of all, consumer credits were granted). The dynamics of the exchange rate of the hryvnia, in the forecast period, will be determined, to a considerable extent, by the NBU policy directed to restricting (avoiding) considerable fluctuations of the exchange rate, and stabilization of the functioning of the exchange market. We expect that, in the second half of 2012, the exchange market will remain relatively stable with possible conjuncture-related fluctuations of the hryvnia exchange rate towards devaluation. For 2012, the exchange rate, as annual average, is expected to amount in the optimistic variant, to Hrn/USD. In 2013, considerable repayments on Ukraine s foreign liabilities, in conditions of possible decrease in hard currency inflow from Ukrainian exports and possible difficulties with foreign financing will result in certain devaluation expectations. In the context of the government s declarations about a gradual shift over a more flexible exchange rate formation, against the background of considerable economic and devaluation risks in 2013, one can expect a controlled devaluation of the hryvnia to the level of as annual average. In , the dynamics of average monthly wages and disposable incomes are forecast at the level close to GDP dynamics with a possible slight excess over the latter indicator, which is caused, first of all, by the direction of the government s policy to attaining a correspondence between the dynamics of wages and that of labor productivity, by the need to accumulate funds for a structural and innovation based modernization of production and by the structural unemployment. IV. Policy Issues and Uncertainties However, there are risks and threats, which may activate the pessimistic scenario with hardly forecastable and ruinous consequences for Ukraine s economy. The considerable external risks are associated with the possibility of the failure of the global economic revival, namely: further aggravation of the tensions on the world financial markets, beginning with the second half of 2012, aggravation of the debt crisis in the euro zone countries, spreading, in the countries - trade partners of Ukraine of the import substitution policy may lead to the loss of important segments on the world markets, in particular, those of the greatest consumer of Ukrainian goods Russian Federation, which would restrict the development of some agrarian subsectors in conditions of the crisis-related drop of foreign demand on the Western markets, and stronger competition on the traditional for Ukraine export markets, instable situation and possible increase in the interest rates on the world capital markets combined with the lowering of the foreign investors propensity to venture risks would lower the accessibility of foreign financing. for Ukraine, and may lead to a rapid reduction of the foreign companies investment plans and intentions related to Ukraine, 9

10 possible considerable decline of the metal prices, on the world commodity markets in (by expert estimates, by up to 15% as compared last year s average annual value of that indicator), as a consequence of possible worsening of the dynamics of China s economic development, which, against the background of lower hard currency inflow from Ukrainian exports may provoke certain inflation expectations and weaken the positions of the national currency. Among the main domestic risks and risks of the forecast period, one should mention the following: Risks related to the development of the real sector: slow down of production revival in export oriented sector would negatively impact of the dynamics of Ukraine s economic development and replenishment of the budget s revenues; possible increase in consumer inflation reaching % and more (as of year end) caused by the following factors: First, appreciation of fuel and food products, in conditions of global instability and possible increase in the prices for imported natural gas in 2013, could lead to an increase in prices for the produce of energy intensive sectors and lower competitiveness of Ukrainian produce on the world markets, second, exchange rate instability related to global devaluation processes and protracted uncertainty on the financial markets combined with the growing expenditures On the servicing on this country s foreign debt and considerable deficit of Ukraine s trade balance, third, continued practice of considerable financial injections in the developed economies with the aim to encourage domestic demand could provoke inflation in the developing and new market economies like Ukraine; accelerated growth of producers prices first of all, those for the produce of food processing, in conditions of possible retention of imported food inflation, the increase in the world prices for agricultural products, which began in summer 2010 in relation of the complex weather conditions in a number of countries caused an appreciation of agricultural items on the world markets by 44,5%, while, in Ukraine, the industrial producers price index in 2010 increased, as annual average, to 20.9%, which was twice the level of consumer inflation. The trend held on in 2011, when the rise of producers prices (by 18.9%) was almost 2.5 times as high as CPI. One can expect the lagged impact of that factor (with a lag of about 4 months) will contribute to the inflationary pressure of the economic development in the medium run; the parliamentary election in October 2012 may enhance the tendency of populist increase in wages, pensions and other social payments, when, despite the considerable lag of labor productivity dynamics behind that of wages, the public funds would be directed, first of all, to consumption, which would shape conditions for another wave of inflation and corresponding reduction of the people s consumption and create, against the background of possible large fluctuations of the conjuncture on the world commodity markets, new threats to the government s financing of their new liabilities, together with the aggravation of the real budget deficit; on the conditions of further drop of the euro exchange rate to the USD, Ukraine s competitiveness could fall to a record high value, including at the expense of devaluation of the currencies in the partner countries. One should point out that, as of early 2012, the gain of Ukraine s economic competitiveness attained by late 2009 as a result of the almost 60% devaluation of the hryvnia, was already almost completely lost. Renewal of Ukraine s competitiveness by late 2013 is only possible at the expense of another devaluation with a moderate (no more than 8.0%) rise of prices or due to a considerable decrease in the price for imported natural gas. 10

11 Risks related to the labor market: further aggravation of the demographic situation due to low natality rate, negative natural movement and population ageing, which lowers the quantitative and qualitative characteristics of the national labor potential and creates threats to the reforms and renewal of this country's economy on the innovation basis, whose removal would require additional measures to raise the productivity (no less than by 2-3% a year) encouragement of labor migration, as well as an efficient state policy in the sphere of natality; possible shortage of skilled personnel, due to the outflow of skilled Ukrainian labor to the countries with higher living standards may become a considerable limiting factor to economic reform and modernization, and, thus, be offset by special public retraining programs. Risks related to the budget sphere: the lack of foreign sources for borrowing to finance the budget deficit and repay previous debts at acceptable terms in conditions of worsening situation on the world financial markets may cause a serious aggravation of the debt problems and provoke a crowding out of funds from the real sector and rise of the cost of financial resources; further accumulation of domestic debt without efficient use of resources on economic modernization, slow down of measures Related to the transition to economically justified prices for gas and tariffs on public utilities and railway transportation. Risks related to the monetary sphere: projected recession and financial and debt crisis in the euro zone, Reduction, in such conditions, of the foreign demand for Ukrainian goods, and possible decrease in the world metal prices with the retention of high prices For imported natural gas during 2013 would determine the impact of crisis phenomena in this country s economy. In this connection, one should expect a retention of the current account negative balance, which threatens with the growth of the payment balance deficit and would cause an abrupt change and volatility of the exchange rate dynamics, the threat of exchange rate instability is also connected with A renewal of the tendency to dollarization of the bank deposits; low credit activity of the commercial banks due to probable retention of a considerable amount of problematic credits in the banking sector and financial instability of the borrowers; reduction of the domestic sources of funding, Budget deficit, volatility of the dynamics of speculative short term capital. Risks related to the social sphere: considerable differentiation of the households by the main income source, increased number of poor people and aggravation of the gap between the rich and the poor in the formation of incomes and expenses; lack of the balance between effective demand of the households and goods supply on domestic consumer market, which may cause a threat of a new wave of inflation and consequent decline in the people s well being. 11