Macroeconomic Review February 2017

Summary GDP growth accelerated to 4.7% in 4Q’2016 to 4Q’2015 (from 2.0% in the previous quarter); Growth in most major branches (excepting agriculture) remained strong in January; 12-m CPI growth accelerated to 12.6% in January, compared with 12.4% month ago. 12-m PPI accelerated to 36.8% from 35.7% month ago; Unemployment rate in 3Q’2016 fell to 8.8% from 9.0% in 2Q’2016. Workforce supply/demand ratio declined to 9.1 in January, compared with 10.8 in December; Real wages grew 11.6% in December 2016 to December 2015. Real incomes of households grew 7.3% in 3Q’2016, compared with 3Q’2015; Deficit of current account (CA) in 2016 was USD 3.4 bn, or 3.6% of GDP; Net FDI inflows were USD 3.4 bn in 2016. Most of them were conversion of Ukrainian banks external debt into equity; Gross international reserves were USD 15.4 bn (3.4 m of import coverage) as of 1 Feb; 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 in 2016 was UAH 55 bn, or 2.4% of GDP. Public and publicly guaranteed debt increased to UAH 1 930 bn (USD 71 bn) as of 1 Jan; In January money supply seasonally shrank. Annual growth of M0 and monetary base moderated to 8.5% and 8.0% 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 4.7% in 4Q’2016, compared with 4Q’2015. Growth accelerated from 2.0% in the previous quarter; GDP grew 1.9% in 4Q’2016, compared with 3Q’2016. Growth accelerated from 0.5% 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 January (compared with January 2016) accelerated to 5.6%, compared with 4.5% month ago; The most remarkable growth in January was in Manufacturing – 9.9%. Growth in Electricity, gas, steam and conditioning air supply was 2.3%, in mining industries - 0.3%; Industrial production growth in 2016 was 2.4%. Freight turnover, cumulative % change compared with the same period of the previous year Freight turnover surged 23.7% in Jan 2017, compared with Jan 2016; Fast growth of freight turnover was driven by growth in following subsectors: pipelines (28.8%), railway trains (22.2%) and motor vehicles (22.1%). It was supported by growth in aircraft (3.3%). Freight turnover of water transport dropped 33.4%; Freight turnover growth in 2016 was 2.4%.

Construction and agriculture Construction, cumulative % change compared with the same period of the previous year Construction surged 35.0% in January 2017, compared with January 2016; Construction growth in 2016 was 13.1%; Construction contraction in 2015 was 12.3%. Agriculture, cumulative % change compared with the same period of the previous year Agriculture declined 2.4% in January 2017, compared with January 2016; 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 grew 3.1% in January 2017, compared with January 2016; Retail trade growth was 4.0% in 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-Nov’2016, compared with Jan-Nov’2015; Real wages grew 11.6% in December 2016, compared with December 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 9.1 times more than demand in January, compared with 10.8 in December. The ratio declined due to increase of demand (from 36.0 to 47.4 th people). Ratio decline was limited by supply growth – from 390.8 to 429.0 th people. The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation CPI increased 1.1% in January. Food prices grew 1.9%; Inflation, yoy % change CPI increased 1.1% in January. Food prices grew 1.9%; 12-m CPI growth accelerated to 12.6% as of January, compared with 12.4% as of December. 12-m CPI remains well below peak 60.9% in April 2015; PPI declined 0.3% in January. It was caused by decline of prices in Electricity, gas, steam and air-conditioning supply (12.6%). Prices in mining industries and manufacturing grew 8.8% and 2.7% respectively; 12-m PPI accelerated to 36.8%, compared with 35.7% as of December.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In December CA deficit was USD 292 m, compared with surplus USD 363 m in December 2015; CA deficit in 2016 widened to USD 3.4 bn, or 3.6% 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 2016 was USD 33.6 bn. It declined 5.2%, compared with 2015; Import of goods in 2016 was USD 40.4 bn. It grew 3.8%, compared with 2015. Energy import declined 27.9%, non-energy – grew 16.2%; The largest trade partner of Ukraine in 2016 was EU. EU share in external goods turnover was 34.6%. Share of Russia was 11.1%.

Terms of trade index (prices) In December index value grew from 101.0 to 101.9. 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 108.3), than import prices (index value 106.3). Terms of trade index (physical volumes) In December index value dropped from 95.6 to 77.6. It is the worst index value since at least 2014. Index value below 100 means negative terms of trade. Sharp negative changes were due to fast growth (compared with the same month of the previous year) of physical import volumes (index value 128.7). Physical export volumes were broadly unchanged (index value 99.9).

Foreign direct investments Net FDI , USD m Net FDI in December 2016 increased USD 49 m; Net FDI in 2016 were USD 3.4 bn, of which 67% (or USD 2.2 bn) to banking sector. Most FDI to banking sector were result of 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 declined to USD 15.4 bn as of 1 Feb 2017, compared with USD 15.5 bn as of 1 Jan 2017; GIR are equal to 3.4 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 January declined to USD 4.0 bn, compared with USD 4.2 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 Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Deficit of consolidated budget in December widened significantly - to UAH 45 bn; In 2016 deficit of consolidated budget widened to UAH 55 bn, compared with UAH 31 bn year ago, or to 2.4% of expected 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 Dec 2016 public and publicly guaranteed debt surged UAH 201 bn, to UAH 1 930 bn. Sharp increase of the debt was mainly due to nationalization of Privatbank. Reassessment of external debt due to depreciation of UAH to USD was another factor of sharp debt increase. In dollar terms, debt grew from USD 67.6 bn to USD 71.0 bn. 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 80.1% to estimated 84.6% of GDP during 2016 (more accurate 2016 value will be in March, after SSSU release of GDP data).

Monetary policy: rate of exchange and interest rates USD/UAH official exchange rate In February hryvnia recovered after depreciation at the start of the year. On Feb 27 USD/UAH reached 26.98, compared with 27.72 as of Jan 17 (weakest point). Average USD/UAH from 1 to 27 of February was 27.05, compared with Jan-2017 average 27.15 (hryvnia appreciated 0.4% to US dollar); UAH depreciation to USD from Feb-2016 to Feb-2017 (average monthly rates as of Feb 27) was 2.4%; 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 After fast growth in December, in January monetary aggregates shrank (mostly due to seasonal factors): M0 declined UAH 19.4 bn, or 6.2%, to UAH 295.0 bn; Monetary base declined UAH 19.6 bn, or 5.1%, to UAH 362.0 bn. Annual growth of monetary base slowed to UAH 26.9 bn, or 8.0%. Annual growth of M0 slowed 23.2 bn, or 8.5%.

Insolvent Banks (as of 27 Feb 2017) Number of banks classified insolvent No one bank has been recognized insolvent in February (as of 27 Feb); 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; 4 banks (Rodovid, Unison, Finansova Iniciatyva and Narodnyi Capital) are managed by provisional administrations; 84 banks are under liquidation procedures. 93 banks continue to work in normal mode (as of Feb 27); After Privatbank recapitalization, market share of government controlled banks increased to 51.3% (as of 1 Jan 2017), share of subsidiaries of foreign banking groups was 34.9%. Market share of other banks declined to 13.8%.

Households deposits, bn In January hryvnia deposits declined 1.1%, to UAH 195.2 bn. Annual (Feb 2016 – Jan 2017) growth was 7.3%; In January FX deposits declined 1.3%, to USD 8.4 bn. Annual (Feb 2016 – Jan 2017) decline was 4.0%. Corporate deposits, bn In January hryvnia deposit portfolio declined 3.3%, to UAH 220.7 bn. Annual (Feb 2016 – Jan 2017) growth of deposit portfolio was 8.0%; In January FX deposits declined 2.7%, to USD 4.6 bn. Annual (Feb 2016 – Jan 2017) growth of deposit portfolio was 1.3%.

Credits Households credits, bn FX credit portfolio in January declined 0.6%, to USD 3.1 bn. Annual (Feb 2016 – Jan 2017) decline was 19.0%; Volume of FX credits declined 88%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio in January grew 1.6%, to UAH 75.7 bn. Annual (Feb 2016 – Jan 2017) decline of UAH credit portfolio slowed to 2.2%. Corporate credits, bn In January FX credit portfolio declined USD 2.3%, to USD 14.7 bn. Annual (Feb 2016 – Jan 2017) decline was 22.4%; In January UAH credit portfolio declined 0.8%, to UAH 425.7 bn. Annual (Feb 2016 – Jan 2017) increase of credit portfolio was 20.9%..