Ukraine’s financial sector bites the bullet

Ukraine’s economy contracted 1.1% during the first quarter of 2013. The gross domestic product (GDP) in current prices amounted to UAH 301.598bn in Q1. In q/q terms, the GDP grew by 0.6%, which was predetermined by a seasonal factor. GDP per capita amounted to UAH 6,624, down by 0.96% y/y.

The country’s economic growth slowed to 0.2% in 2012 from 5.2% in 2011. After first-quarter GDP data was released, most of the rating agencies and global financial institutions lowered their full-year GDP growth forecast for Ukraine. The GDP is expected within a range of a growth of 1.1% to a contraction of 0.5%.

The World Bank believes that the 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 the authorities.

Read more in Intellinews’s comprehensive report, Ukraine’s Financial Sector>>

 

Ukraine’s currency may have to be devalued

The IMF has maintained its GDP growth forecast for 2012 at 3% y/y compared to 5% growth recorded in 2011. In 2013, the GDP growth is expected to reach 3.5%. The global slowdown of economic growth has a great impact on the Ukrainian economy as one of the CIS energy importing economies, the IMF noted. Moreover, the IMF warns about risks in case of intense crisis in the Eurozone. For the energy importers in the region, direct trade spillovers from a further escalation of euro crisis would also be sizable given that Europe is the most important trading partner outside the region. If downside risks materialize, external balances would deteriorate, which would tend to exacerbate capital outflows and put pressure on currencies, especially among energy importers with large external financing needs (Ukraine).

Rating agency Fitch believes that the local currency hryvnia may fall 10% by the end of the year due to “fairly weak” confidence in the currency. A slight devaluation and adopting to more flexible exchange rate would benefit the country, the agency noted. At the same time, officials, including PM Mykola Azarov assures of a stable hryvnia and brushes off economic preconditions for devaluation. The hryvnia, which has declined 1.2% against the dollar this year, was devalued by almost 35% in Q4 2008.

We believe that Ukraine will have to devalue national currency in the next few months in order to support competitiveness of exports and prevent the growth of foreign trade deficit. If the economic situation worsens, the drop in NBU’s reserves may reach critical level and devaluation may be inevitable.

The outlook on domestic banking system remains negative, according to Moody’s Investors Service. The rating agency believes the challenging operating environment and weak economic growth through 2013 as main causes. The real GDP growth is expected to decelerate to around 2.5-3.0% in 2012. According to the rating agency, this weak economic performance will continue to weigh on banks’ credit growth and financial positions over the next 12-18 months.

 

 

 

 

Much more in the Intellinews report: Ukraine Financial Sector Report