The dollar equivalent of Ukraine’s GDP for 2019 will reach $156
billion and annual growth will be 19.5%.
Real GDP growth for 2019 year will be 3.76%.
The results deviate significantly from the forecast of Ukraine
Economic Outlook made a year ago. The main factors contributing to accelerated
GDP growth in 2019 (in excess of our forecast) were the influx of money from
non-residents to the Domestic Government Loan Bonds (OVDP) market and the sharp
jump in world metal prices in the first half of the year.
Recall that at the beginning of December last year, Ukraine Economic Outlook forecast $147 billion (+12.6% versus +19.5% actual). At the same time, our forecast turned out to be more accurate than the IMF forecast, which estimated the value of Ukraine’s GDP at the end of 2019 at $133 (5.2% increase).
Forecast for 2020: Scenario A
Our basic forecast for the development of the Ukrainian economy
in 2020 provides for two scenarios: Scenario A (subject to maintaining the
current NBU policy on the so-called inflation targeting), assumes maintenance
of the current trend of the hryvnia revaluation. In this case, by May-June, the
hryvnia exchange rate may strengthen to UAH 22/1 USD.
Disproportions in the balance of payments that have arisen with
such a course will require the support of the hryvnia from the National Bank of
Ukraine. Given the standards to support the positive dynamics of gold and
foreign exchange reserves, the regulator will have to switch to a smooth
devaluation of the hryvnia to the detriment of the target inflation ranges.
That is, the “effect of the compressed exchange rate spring” will
work when the rate, all things being equal, reaches the value of UAH 26.5/1 USD
by the end of the year under the influence of the balance of supply and demand.
Under scenario A, production and export levels will be
suppressed during the first half of the year as well as the whole of 2019 by
the NBU’s inflation targeting policy. Despite the devaluation from UAH 22 to
UAH 26.5/1 USD in the second half of the year, full recovery will not be
Real GDP growth will slow down next year to 1.9%, the GDP
deflator (the general change in prices in the economy) will not exceed 9.3% and
consumer inflation due to devaluation in the second half of the year can grow
Calculated in US dollars, GDP of Ukraine by the end of 2020,
despite the slowdown in real GDP growth and a decrease in foreign currency
inflows from $6 to $4 billion a year, will increase to $190 billion. .
for 2020: Scenario B
Scenario B provides for the easing of the NBU’s monetary policy
and the implementation from January of a controlled devaluation of the hryvnia
from the current UAH 23.5 to UAH 27 UAH/1 USD.
Under this scenario, the total inflow of foreign currency into
the country will increase from the current $6 billion to $7.4 billion dollars,
including NBU reserves increasing by $2.2 billion, since the central bank will
be able to buy back the surplus currency coming into the country (as opposed to
Scenario A, at which the NBU’s gold reserves due to the inability to issue hryvnia
in the required amount to reduce inflation will grow by only $0.9 billion per
Scenario B, taking into account the devaluation trend and the
easing of monetary policy (which is necessary for redemption of foreign
currency surplus reserves), will generate higher general inflation in the
economy (the value of the GDP deflator according to our forecast will be 13.95%
against 9.84% in 2019) .
However, at the same time, a weakening inflationary policy and a
weakening exchange rate will stimulate economic growth: real GDP will grow by
3.2% (against 1.9% under Scenario A).
In 2020, with the abandonment of tight monetary policy
(according to Scenario B), the dollar GDP of Ukraine will grow to a value of $187
billion, if the growth is not “adjusted” by the autumn global financial crisis.
According to both 2020 scenarios, Ukraine will cope with
external and internal debt payments by successfully refinancing them. At the
same time, the total inflow of currency into the country (inclusively, with an
increase in the foreign exchange position by the population) will be from $4 to
$7.4 billion (according to Scenarios A and B).
2020: Possible impact of the “global financial crisis”
Most financial analysts today predict that in September 2020,
with a much greater probability than was expected in 2019, a global financial
crisis could occur.
We calculated the main factors affecting the global crisis on
our economy and, in particular, the balance of payments and the likely change
in key macroeconomic indicators, depending on whether we approach the crisis
under Scenario A or B.
A probable recession of the world economy, limited in nature,
could bring down the world Commodities Price Index by 30%. That in turn could
lead to the shortfall of almost a third of foreign exchange earnings from
commodity exports. It is important to note that we are also waiting for a drop
in export deliveries of products with a high level of redistribution to Ukraine’s
trading partners. These are significantly vulnerable to fluctuations in the
global economy. As the experience of 2008-2009 and 2014-2015 shows, all
categories of Ukrainian exports fall synchronously, regardless of the product
At the same time, the stability of our trading partners from
2008-2009 and 2014-2015 has not changed and is only 0.38, according to the
Ukraine Economic Outlook’s proprietary index (from 0 to 1).
The receipt of money by non-residents on OVDP market will stop
and, on the contrary, many “portfolio companies” will want to
“withdraw” their capital from the market. However, the low liquidity
of the OVDP secondary market, according to our forecast, will not allow their
non-resident owners to repatriate more than $1-1.5 billion.
According to our calculations (according to Scenario B), the
hryvnia exchange rate devaluation from the level of UAH 27 to UAH 31.7/ 1 USD will
be able in four months to equalize the created imbalance and restore
macro-financial stability. With a high degree of probability, when receiving an
unscheduled stabilization loan from the IMF (in the event of the September
global financial crisis), the NBU will also be able to use its reserves of up
to $3 billion in order to keep the rate below the psychologically important
mark of 30 UAH /1 USD.
If Ukraine approaches the probable September world crisis
(according to Scenario A) with a lower (summer) value of the exchange rate of UAH
22/1 USD, and even weakened as a result of revaluation by industry and
suppressed exports, then achieving a new equilibrium at a value of UAH 30-31.7/1
USD dollars will mean 44% devaluation per quarter.
In this case, based on the scenarios of the previous crises of
2008 and 2014, we can predict that such a high percentage of devaluation will
inevitably “trigger” an internal additional factor in the development
of the crisis in the form of “flight of depositors” from banks and
much higher demand from the population for foreign currency than $1 billion per
month. Under this scenario, a way out of the crisis without an additional IMF
loan, a significant sale of NBU reserves and tough administrative measures by
the NBU in the foreign exchange market restricting the free sale of dollars in
cash and non-cash markets will not be possible. Aggravated by internal factors,
it is highly probably the economy will not be able overcome the crisis in one
or two quarters, and the downturn will “stretch” throughout the
Therefore, we consider the issue of “softening” the
NBU’s monetary policy not only to be a question of economic growth in 2020,
but, first of all, it is a question of “resilience” of Ukraine’s
economy and the banking system to the impending global crisis. A smooth
devaluation of the exchange rate to the level of UAH 27/1 USD will not only
stimulate economic growth in 2020, but it will also make our economy more
stable in the face of external challenges.