Macroeconomic Review January 2017

Summary GDP growth accelerated to 2.0% in 3Q’2016 to 3Q’2015 (from 1.4% in the previous quarter); Growth in most major branches continued to strengthen in December; 12-m CPI growth accelerated to 12.4% in December, compared with 12.1% month ago. 12-m PPI accelerated to 35.7% from 32.0% month ago; Unemployment rate in 3Q’2016 fell to 8.8% from 9.0% in 2Q’2016. Workforce supply/demand ratio increased to 10.8 in December, compared with 6.3 in November; Real wages grew 8.4% in November 2016 to November 2015. Real incomes of households grew 7.3% in 3Q’2016, compared with 3Q’2015; Annual (December 2015 – November 2016) deficit of current account (CA) was USD 2.7 bn, or 3.1% of GDP. CA deficit in Jan-Nov 2016 was USD 3.1 bn, or 3.7% of GDP; Net FDI inflows were USD 3.3 bn in Jan-Nov 2016. Most of them were conversion of Ukrainian banks external debt into equity; Gross international reserves were USD 15.5 bn (3.7 m of import coverage) as of 1 Jan; External debt grew to USD 116 bn at the end of 3Q’2016, compared with USD 115 bn at the end of 2Q’2016. External debt declined significantly from peak USD 142 bn at the end of 2013; Deficit of consolidated budget was UAH 10.0 bn in Jan-Nov’2016, compared with surplus UAH 20.0 bn year ago. Public and publicly guaranteed debt was UAH 1 729 bn (USD 68 bn) as of 1 Dec; Money supply growth accelerated. Overall increase of M0 and monetary base in 2016 was 11.5% and 13.6% respectively; NBU kept discount rate at 14.0% in January. Next NBU meeting will be on March 2.

GDP GDP, % change compared with the same quarter of the previous year GDP, % change compared with the previous quarter GDP grew 2.0% in 3Q’2016, compared with 3Q’2015. Growth accelerated from 1.4% in the previous quarter; GDP grew 0.5% in 3Q’2016, compared with 2Q’2016. Growth slowed slightly from 0.6% in the previous quarter; GDP decline in 2015 was 9.9%. It was 6.6% in 2014.

Industrial production and transport Industrial production, cumulative % change compared with the same period of the previous year Industrial production growth in 2016 was 2.4%. It accelerated from 2.1% in Jan-Nov 2016; Industrial production growth in December (compared with December 2015) accelerated to 4.5%, compared with 3.7% month ago; The most remarkable growth in 2016 was in Manufacturing – 3.5%. Growth in Electricity, gas, steam and conditioning air supply was 2.6%. Mining industries contracted 0.3%. Freight turnover, cumulative % change compared with the same period of the previous year Freight turnover growth in 2016 was 2.4%. It accelerated from 2.1% in Jan-Nov 2016; The fastest growth of freight turnover was in pipelines (+17.0%). It was supported by motor vehicles and aircraft - 9.1% and 7.0% respectively. Freight turnover of railway trains and water transport continued to decline – 4.0% and 26.4% respectively.

Construction and agriculture Construction, cumulative % change compared with the same period of the previous year Construction growth in 2016 was 13.1%. It slowed from 14.1% in Jan-Nov 2016; Growth in December 2016 to December 2015 slowed to 5.8%; Construction contraction in 2015 was 12.3%. Agriculture, cumulative % change compared with the same period of the previous year 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 % change compared with the same period of the previous year Retail trade turnover growth in 2016 was 4.0%. It accelerated from 3.7% in Jan-Nov 2016; Retail trade decline was 20.7% in 2015. Households real income, % change compared with the same quarter of the previous year Growth of real incomes of households accelerated to 7.3% in the 3Q’2016 (compared with the 3Q’2015) from 5.6% in the 2Q’2016; Real wages grew 8.8% in Jan-Oct’2016, compared with Jan-Oct’2015; Real wages grew 8.4% in November 2016, compared with November 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 3Q’2016: Unemployment rate was 8.8%; Civilian labor force was 18.1 m persons, of which unemployed persons – 1.6 m; Participation rate was 62.7%; Employment-population ratio was 57.2%. Workforce supply was 10.8 times more than demand in December, compared with 6.3 in November. The ratio increased due to simultaneous growth of supply (from 337.9 to 390.8 th people) and decline of demand (from 53.3 to 36.0 th people). It is caused by seasonal factors. The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation CPI increased 0.9% in December. Food prices grew 1.6%; Inflation, yoy % change CPI increased 0.9% in December. Food prices grew 1.6%; 12-m CPI growth accelerated to 12.4% as of December, compared with 12.1% as of November. 12-m CPI remains well below peak 60.9% in April 2015; PPI increased 3.2% in December. Prices in mining industries and manufacturing grew 13.5% and 2.9% respectively. Prices in Electricity, gas, steam and air-conditioning supply declined 0.3%; 12-m PPI accelerated to 35.7%, compared with 32.0% as of November.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In November CA deficit was USD 165 m, compared with USD 249 m in November 2015; CA deficit in Jan-Nov 2016 was USD 3.1 bn, or 3.7% of GDP, compared with USD 0.6 bn (0.7% of GDP) in Jan-Nov 2015; Annual (Dec 2015 – Nov 2016) CA deficit was USD 2.7 bn, or 3.1% of GDP. It was USD 2.8 bn, or 3.2% of GDP, month ago. Trade in goods, 12-m sliding curve, USD bn In November 2016 to November 2015 export of goods grew 15.4% (to USD 3.4 bn); In November 2016 to November 2015 import of goods grew 17.8% (to USD 4.0 bn). Energy import grew 16.6%, non-energy - 18.2%; The largest trade partner of Ukraine in Jan-Nov 2016 was EU. EU share in external goods turnover was 34.6%. Share of Russia was 11.0%.

Terms of trade index (prices) In November index value declined from 102.7 to 101.0, but remains above 100. Value above 100 reflects positive terms of trade. Positive index value was due to more significant rise (compared with the same month of the previous year) of export prices (index value 104.7), than import prices (index value 103.7). Terms of trade index (physical volumes) In November index value declined from 97.1 to 95.6. Index value below 100 means negative terms of trade. Negative index value was due to faster growth (compared with the same month of the previous year) of physical import volumes (index value 114.9), than physical export volumes (index value 109.9).

Foreign direct investments Net FDI , USD m Net FDI in November 2016 increased USD 132 m. They were allocated equally to real sector of economy and banking sector (USD 66 m to each sector); Net FDI in Jan-Nov 2016 were USD 3.3 bn, compared with USD 2.2 bn in Jan-Nov 2015. Increase was ensured mostly by conversion 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 15.5 bn as of 1 Jan 2017, compared with USD 15.3 bn as of 1 Dec 2016; GIR are equal to 3.7 months of import coverage; 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 December grew to USD 4.3 bn, compared with USD 3.9 bn month ago. External Debt, eop USD bn External debt grew to USD 116.0 bn at the end of the 3Q’2016, compared with USD 115.0 bn at the end of the 2Q’2016; External debt declined significantly, compared with the historical maximum level (USD 142.1 bn as of 1 Jan 2014).

Budget Surplus of consolidated budget in November was UAH 16.9 bn; Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Surplus of consolidated budget in November was UAH 16.9 bn; In Jan-Nov 2016 deficit was UAH 10.0 bn, compared with surplus UAH 20.0 bn year ago; Deficit of consolidated budget declined from UAH 72 bn to UAH 31 bn in 2015, or from 4.5% to 1.6% of GDP.

Public and publicly guaranteed debt Nominal values, bn % of GDP Public and publicly guaranteed debt increased from 69.4% to 80.1% of GDP during 2015. Increase in 2015 (+10.7% of GDP) was much less than in 2014 (+29.5% of GDP). Large part of Debt/GDP ratio growth was due to GDP contraction (-9.9% in 2015). In Jan-Nov’2016 public and publicly guaranteed debt grew from UAH 1 572 bn to UAH 1 729 bn. At the same time, debt grew from USD 65.5 bn to USD 67.5 bn. Debt/GDP ratio is expected to reach 90.3% by the end of 2016. It coincides with Euro Area Government debt at the end of 2015 – 90.4% of GDP.

Monetary policy: rate of exchange and interest rates USD/UAH official exchange rate In January hryvnia was under pressure. Jan 17 USD/UAH reached 27.72 (weakest point), before recovering to 27.21 on Jan 26. Average USD/UAH from 1 to 26 of January was 27.25, compared with Dec-2016 average 26.20 (hryvnia lost 3.8% of it’s value to US dollar); UAH depreciation to USD from Jan-2016 to Jan-2017 (as of Jan 26) was 11.0%; 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 Jan 26 NBU kept discount rate unchanged again - 14.0%. NBU stopped easing cycle due to increased inflation risks. Last change of discount rate (cut from 15.0% to 14.0%) was in October 2016; Interest rate on overnight liquidity providing transactions kept 16.0% (discount rate + 2%); Interest rate on overnight certificates of deposit kept 12.0% (discount rate – 2%); Next NBU meeting on interest rates will be on Mar 2 2017.

Monetary policy: money supply Cash (M0), % change compared with the same month of the previous year Monetary base, % change compared with the same month of the previous year In December monetary aggregates rose sharply: M0 grew UAH 25.7 bn, or 8.9%, to UAH 315.2 bn; Monetary base grew UAH 24.0 bn, or 6.7%, to UAH 381.6 bn. Annual growth of monetary base accelerated to UAH 45.6 bn, or 13.6%. M0 increase in 2016 was UAH 32.5 bn, or 11.5%.

Insolvent Banks (as of 26 Jan 2017) Number of banks classified insolvent 3 banks (Platinum bank, Narodnyi Capital and Fortuna) have been recognized insolvent in January. One bank (Finbank) is expected to be liquidated by decision of owners in February; 91 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; 6 banks (Rodovid, Unison, Finansova Iniciatyva, Platinum bank, Narodnyi Capital and Fortuna) are managed by provisional administrations; 82 banks are under liquidation procedures. 93 banks continue to work in normal mode (as of Jan 26); After Privatbank recapitalization, market share of government controlled banks increased approximately to 53%, share of subsidiaries of foreign banking groups remained at 34%. Market share of other banks declined to 13%.

Households deposits, bn In December hryvnia deposits grew 1.9%, to UAH 198.0 bn. Total growth in 2016 was 5.2%; In December FX deposits portfolio declined 1.8%, to USD 8.5 bn. Total decline in 2016 was 2.4%. Corporate deposits, bn In December hryvnia deposit portfolio grew 6.0%, to UAH 227.6 bn. Deposit portfolio in 2016 grew 12.0%; In December FX deposits declined 2.1%, to USD 4.7 bn. Total growth in 2016 was 3.3%.

Credits Households credits, bn FX credit portfolio in December declined 1.7%, to USD 3.1 bn. Total decline in 2016 was 18.9%; Volume of FX credits declined 88%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio declined 0.8%, to UAH 74.5 bn, in December. UAH credit portfolio decline in 2016 was 4.0%. Corporate credits, bn In December FX credit portfolio declined USD 1.5%, to USD 15.1 bn. Overall decline in 2016 was 20.5%; In December UAH credit portfolio declined 0.7%, to UAH 431.4 bn. Overall increase of credit portfolio in 2016 was 22.3%..