Macroeconomic Review November 2017

Summary Real GDP increased 2.1% in the 3Q’2017, compared with the 3Q’2016; In October construction, retail trade and transport growth slowed. Industrial production decline remained marginal (0.2% as of Jan-Oct). Agriculture contraction deepened to 2.3%; 12-m CPI decelerated to 14.6% in October, compared with 16.4% month ago. It exceeds significantly inflation target for 2017 – 8.0%. 12-m PPI decelerated to 18.8% from 22.4% month ago; Unemployment rate in the 2Q’2017 declined to 9.1% from 10.1% in the 1Q’2017. Workforce supply/demand ratio declined to 3.9 (the lowest value at least since 2010) in October, compared with 4.1 in September; Real wages grew 17.3% in September 2017 to September 2016. Real incomes of households grew 1.7% in the 2Q’2017, compared with the 2Q’2016. Real incomes grew 0.3% in 2016; Current account (CA) deficit in Jan-Sep 2017 was USD 3.0 bn (3.9% of GDP). Annual (Oct 2016 – Sep 2017) CA deficit was USD 3.8 bn (4.0% of GDP); Net FDI inflows in Jan-Sep 2017 were USD 2.0 bn. Net FDI inflows were USD 3.3 bn in 2016; In October gross international reserves (GIR) of NBU grew USD 0.1 bn, to USD 18.7 bn (3.7 m of import coverage) as of Nov 1; In the 2Q’2017 external debt grew USD 1 bn, to USD 115 bn. External debt declined USD 27 bn from peak USD 142 bn at the end of 2013; Deficit of consolidated budget in September 2017 was UAH 27 bn. Surplus of consolidated budget narrowed to UAH 42 bn in Jan-Sep 2017, compared with UAH 69 bn in Jan-Aug’2017. Deficit of consolidated budget in 2016 was 2.3% of GDP; Public and publicly guaranteed debt grew UAH 85 bn, to UAH 2 043 bn in September (in dollar terms, debt grew USD 0.5 bn, to USD 77 bn). It was UAH 1 930 bn (USD 71 bn), or 81.0% of GDP, as of Jan 1; In Oct M0 and monetary base grew 0.7% and 0.9% respectively. Annual growth of M0 and monetary base accelerated to 5.3% and 6.2% respectively; On Oct 26 NBU raised discount rate from 12.5% to 13.5% due to high inflation. Next NBU meeting will be on Dec 14.

GDP Real GDP, percent change from quarter one year ago Real GDP, percent change from preceding quarter GDP increased 2.1% in the 3Q’2017, compared with the 3Q’2016. Growth decelerated from 4.8% in the 4Q’2016; GDP grew 0.2% in the 3Q’2017, compared with the 2Q’2017; Real GDP increased 2.3% in 2016; GDP decline in 2015 was 9.8%. It was 6.6% in 2014.

Industrial production and transport Industrial production, cumulative percent change from the same period one year ago Industrial production contracted 0.2% in Jan-Oct 2017, compared with Jan-Oct 2016; Industrial production rose 0.4% in October 2017 to October 2016, of which Manufacturing – 5.7%. Mining industries and Electricity, gas, steam and conditioning air supply declined 8.1% and 7.6% respectively; Industrial production growth in 2016 was 2.8%. Freight turnover, cumulative percent change from the same period one year ago Freight turnover growth slowed to 6.9% in Jan-Oct 2017, compared with Jan-Oct 2016. Growth was 8.1% in Jan-Sep 2017; Growth was in all transport subsectors, namely: aircraft - 19.1%, pipelines - 14.9%, water transport - 11.1%, motor vehicles - 8.3%, railway trains - 2.5%; Freight turnover growth in 2016 was 2.6%.

Construction and agriculture Construction, cumulative percent change from the same period one year ago Construction growth in Oct 2017, compared with Oct 2016, was 13.1%; Construction rose 23.4% in Jan-Oct 2017, compared with Jan-Oct 2016; Construction growth in 2016 was 17.4%; Construction contraction in 2015 was 12.3%. Agriculture, cumulative percent change from the same period one year ago Agriculture contraction deepened to 2.3% in Jan-Oct 2017, compared with Jan-Oct 2016 (It was only 0.7% in Jan-Sep 2017). Crop production contracted 2.9%, decline in animal production was 0.5%; Agriculture grew 6.1% in 2016, of which crop production grew 9.7%, animal production declined 2.6%; Agriculture contraction in 2015 was 4.8%.

Retail trade and households incomes Retail trade turnover, cumulative percent change from the same period one year ago Retail trade turnover rose 8.2% in Jan-Oct 2017, compared with Jan-Oct 2016. Retail trade turnover growth in Oct 2017, compared with Oct 2016, was 4.2%; Retail trade growth was 4.0% in 2016; Retail trade decline was 20.7% in 2015. Households real income, percent change from quarter one year ago Real incomes of households grew 1.7% in the 2Q’2017, compared with the 2Q’2016; Real incomes of households grew 0.3% in 2016, after 22.3% drop in 2015; Real wages increased 17.3% in September 2017, compared with September 2016; Real wages increased 19.0% in Jan-Aug 2017, compared with Jan-Aug 2016; Real wages grew 9.0% in 2016, after 20.2 drop in 2015.

Unemployment rate, % ILO methodology Workforce supply to demand ratio Labor market Unemployment rate, % ILO methodology Workforce supply to demand ratio Key labor market indicators as of the 2Q’2017: Unemployment rate was 9.1%; Civilian labor force was 18.0 m persons, of which unemployed persons – 1.6 m; Participation rate was 62.5%; Employment-population ratio was 56.8%. Workforce supply was 3.9 times more than demand (the lowest value at least since 2010) in October, compared with 4.1 in September. The ratio declined due to decrease of unemployed persons (from 303 to 282 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation, yoy % change Inflation targeting CPI grew 1.2% in October. Food prices grew 1.1%; CPI growth to December of the preceding year was 11.5%; 12-m CPI growth decelerated to 14.6% as of October, compared with 16.4% as of September. It exceeds significantly inflation target for 2017 – 8.0%; PPI increased 2.3% in October. Prices in Manufacturing and Mining industries increased 3.1% and 2.8% respectively. Electricity, gas, steam and air-conditioning supply prices declined 0.1%; PPI growth to December of the preceding year was 12.6%; 12-m PPI decelerated to 18.8% as of October, compared with 22.4% as of September.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In September 2017 CA deficit was USD 998 m, compared with USD 943 m in September 2016; In Jan-Sep 2017 CA deficit was USD 3.0 bn (3.9% of GDP); Annual (Oct 2016 – Sep 2017) CA deficit was USD 3.8 bn (4.0% of GDP); CA deficit in 2016 widened to USD 3.8 bn (4.1% of GDP), compared with USD 0.2 bn (0.2% of GDP) in 2015. Trade in goods, 12-m sliding curve, USD bn Export of goods in September 2017 was USD 3.4 bn. It increased 17.7%, compared with September 2016; Import of goods in September 2017 was USD 4.3 bn. It increased 21.0%, compared with September 2016; The largest trade partner of Ukraine in Jan-Sep 2017 was EU. EU share in external goods turnover was 36.5%. Share of Russia was 11.5%.

Terms of trade index (prices) In September index value rose from 98.9 to 100.5. Index value is close to 100 and reflects “neutral” terms of trade. It was formed due to simultaneous growth (compared with the same month of the previous year) of export prices (index value 114.7) and import prices (index value 114.1). Terms of trade index (physical volumes) In September index value declined from 100.8 to 95.5. Index value below 100 reflects “negative” terms of trade. It was formed due to faster growth (compared with the same month of the previous year) of physical import volumes (index value 110.4), than physical export volumes (index value 105.4).

Foreign direct investments Net FDI , USD m Net FDI in September 2017 increased USD 180 m, of which USD 149 m – to real economy; Net FDI in Jan-Sep 2017 increased USD 2.0 bn; Net FDI in 2016 were USD 3.3 bn, of which 67% (or USD 2.2 bn) to the banking sector. Most FDI to the banking sector were result of conversions of Ukrainian banks debt to their foreign parents banks into equity; Net FDI inflows in 2015 were USD 3.0 bn, compared with USD 0.3 bn in 2014 (10-times increase).

Reserves and external debt Gross International Reserves, months of import coverage Gross international reserves (GIR) of NBU grew to USD 18.7 bn (3.7 months of import coverage) as of 1 Nov 2017, compared with USD 18.6 bn as of 1 Oct 2017; GIR are well above the lowest point – USD 5.6 bn, or 1 month of import coverage, - reached at the end of February 2015; Net international reserves (NIR) of NBU in October rose to USD 6.2 bn, compared with USD 6.1 bn month ago; GIR growth was supported by allocation of USD 185 m dollar denominated T-bills. NBU interventions (net USD 147 m) limited GIR growth. External Debt, eop USD bn In the 2Q’2017 external debt grew USD 1.2 bn, to USD 114.8 bn; External debt declined USD 0.2 bn during last year (3Q’2016 – 2Q’2017); External debt declined USD 27.2 bn, compared with the historical maximum level (USD 142.1 bn as of 1 Jan 2014).

Budget Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Deficit of consolidated budget in September 2017 was UAH 27.0 bn; Surplus of consolidated budget in Jan-Sep’2017 narrowed to UAH 42 bn, compared with UAH 69 bn in Jan-Aug 2017; In 2016 deficit of consolidated budget widened to UAH 55 bn, compared with UAH 31 bn year ago, or to 2.3% of GDP from 1.6% of GDP. It was generated by state budget (deficit UAH 70 bn) and offset partly by surpluses of local budgets.

Public and publicly guaranteed debt Nominal values, bn % of GDP In September 2017 public and publicly guaranteed debt grew UAH 85 bn, to UAH 2 043 bn. In dollar terms, debt grew USD 0.5 bn, to USD 77.0 bn. Public and publicly guaranteed debt has risen UAH 113 bn (USD 6.1 bn in dollar terms) since the start of the year. In 2016 public and publicly guaranteed debt increased UAH 408 bn (from UAH 1 572 bn to UAH 1 930 bn). At the same time, debt increased USD 5.5 bn (from USD 65.5 bn to USD 71.0 bn). Public and publicly guaranteed debt increased from 79.1% to 81.0% of GDP during 2016.

Monetary policy: rate of exchange and interest rates USD/UAH official exchange rate In November USD/UAH was stable. Average USD/UAH from 1 to 24 of November was 26.66, compared with October 2017 average 26.65; UAH depreciation to USD from November 2016 to November 2017 (average monthly rates as of November 24) was 3.6%; Average USD/UAH in 2016 was 25.55, compared with 2015-average 21.84 (UAH depreciation to USD was 14.5%). NBU discount rate On Oct 26 NBU raised discount rate from 12.5% to 13.5% due to high inflation: current inflation level (14.6%) exceeds inflation target (8%) almost 2 times; Interest rate on overnight liquidity providing transactions raised from 14.5% to 15.5% (discount rate + 2%); Interest rate on overnight certificates of deposit raised from 10.5% to 11.5% (discount rate – 2%); Next NBU meeting on interest rates will be on Dec 14 2017.

Monetary policy: money supply Cash (M0), percent change from month one year ago Monetary base, percent change from month one year ago Changes of money supply in October: Monetary base grew UAH 3.2 bn, or 0.9%, to UAH 376.6 bn; M0 grew UAH 2.2 bn, or 0.7%, to UAH 308.6 bn. Annual growth of monetary aggregates remained moderate: Monetary base increased UAH 22.0 bn, or 6.2%; M0 increased 15.5 bn, or 5.3%.

Insolvent Banks (as of 24 Nov 2017) Number of banks classified insolvent In November one bank (Bohuslav) has been recognized insolvent. Owners of one more bank (Credit Optima Bank) decided to reorganize it as non bank legal entity, but this bank still operates in normal mode. 96 banks have been recognized insolvent by the NBU Resolutions or decided to leave the market since 01.01.2014, of which: 1 bank (Privatbank) has been sold to government; 1 bank (Astra) has been sold to private investors; 4 banks (Bohuslav, Rodovid, Unison and Finansova Iniciatyva) are managed by provisional administrations; 90 banks are under liquidation procedures. 87 banks continue to operate in normal mode (as of Nov 24); After Privatbank recapitalization, market share of government controlled banks increased to 54.8% (as of 1 Jul 2017), share of subsidiaries of foreign banking groups was 31.2%. Market share of other banks declined to 14.0%.

Households deposits, bn In October hryvnia deposits declined 0.1%, to UAH 217.4 bn. Annual (Nov 2016 – Oct 2017) growth was 12.7%; In October FX deposits declined 0.1%, to USD 8.4 bn. Annual (Nov 2016 – Oct 2017) decline was 3.9%. Corporate deposits, bn In October hryvnia deposits portfolio increased 0.7%, to UAH 232.0 bn. Annual (Nov 2016 – Oct 2017) growth of deposit portfolio was 7.1%; In October FX deposits declined 4.4%, to USD 5.2 bn. Annual (Nov 2016 – Oct 2017) growth of deposit portfolio was 4.6%.

Credits Households credits, bn FX credit portfolio in October declined 1.2%, to USD 2.7 bn. Annual (Nov 2016 – Oct 2017) decline was 18.1%; Volume of FX credits declined 90%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio in October increased 3.0%, to UAH 92.3 bn. Annual (Nov 2016 – Oct 2017) growth of UAH credit portfolio was 23.8%. Corporate credits, bn In October FX credit portfolio increased 1.8%, to USD 13.7 bn. Annual (Nov 2016 – Oct 2017) decline was 16.8%; In October UAH credit portfolio rose 0.4%, to UAH 455.9 bn. Annual (Nov 2016 – Oct 2017) increase of credit portfolio was 12.7%.