BMI View: We believe that Ukraine has now entered recession and do not expect to see a recovery in 2013. We have downgraded our real GDP forecast to -0.5%, from a previous forecast of 1.0%, und erpinned by a weak export base and currency instability.
While Q412 readings have yet to be released, we believe the Ukrainian economy is now in recession , and expect the headline growth reading for 2012 to show that Ukraine grew by an estimated 0.1% in real GDP terms . Weak external demand for steel coupled with an overvalued currency in the first half of the year will cause net exports to drag on growth. With no gas deal from Russia, and IMF financing remaining frozen, the economy remains highly vulnerable to external conditions. While we see scope for improvement in the second half of the year due to a number of factors including the likelihood of a weaker currency, an improving regional growth outlook, and the possibility of an IMF deal, we expect Ukraine to spend at least the first half of the year in economic contraction. As such, we have downgraded our real GDP forecast for 2013 to -0.5% , from a previous forecast of 1.0% .
|Back In Recession|
|Ukraine - Real GDP Growth & Industrial Production, % chg y-o-y|
The weak condition of the domestic steel industry underpins our expectations for net exports to struggle in 2013. Slow growth in Europe an and Asian markets has driven a hefty slowdown in Ukraine ' s key steel export base. While the recent wave of Chinese stimulus has dri ven a slight recovery in Ukrainian steel prices, which lost around 15% over the course of 2012, we are not convinced that these dynamics will persevere beyond Q113. Furthermore, iron ore prices have risen rapidly since Q412, squeezing the margins of domestic steel producers. Coincident economic indicators are pointing towards sustained contraction , with industrial production shrinking by 7.6% in November.
|Private Consumption Will Eventually Weaken|
|Ukraine - Real Wage Growth, % chg y-o-y|
Household consumption should provide some growth opportunities, supported by double digit real wage growth. Retail sales remained robust throughout 2012, and should continue to do so in Q1 13. Beyond this our expectation for hryvnia devaluation poses major risks to this dynamic. Even a moderate devaluation to UAH9.0000/US$ would cause roughly a 10% rise in the debt servicing costs of FX-denominated loans which account for 38% of total resident loans outstanding , reducing disposable income and dampening retail sales. In addition, consumers would also find their purchasing power reduced for imported goods, although lower demand for imported goods could prove slightly beneficial for net exports . However, given that around 25% of Ukraine ' s imports are oil and gas products, rather than consumer discretionary imports, it is unlikely that this effect would offset the impact to growth from lower household consumption.
|Freight Loads Confirm The Trend|
|Ukraine - Cargo Transportation, % chg y-o-y & as a percentage of total freight|
Cargo transportation data also confirms the trend of slowing output, with railway freight - which accounts for around 60% of total freight - down 2.5% year-on-year (y-o-y), and pipeline transportation - which accounts for 17% of total freight - down 17% y-o-y in 2012 . The drop in pipeline transportation is largely due to Gazprom taking advantage of new transit pipeline routes, building up traffic via Belarus and also through Nord Stream, particularly following the completion of the second phase of the pipeline in November. We do not envisage a recovery in pipeline transit volumes in 2013 - Gazprom will continue to bypass Ukraine where possible in order to reduce Ukraine ' s economic leverage of the Russia.