Macroeconomic Review September 2017

Summary Real GDP increased 2.3% in the 2Q’2017, compared with the 2Q’2016; Construction, transport and retail trade continued to grow. Agriculture renewed growth for the first time in 2017. Industrial production contraction diminished to marginal 0.4% (as of Jan-Aug 2017); 12-m CPI accelerated to 16.2% in August, compared with 15.9% month ago. 12-m PPI accelerated to 23.6% from 23.3% 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 4.0 in August (the lowest value at least since 2010), compared with 4.9 in July; Real wages grew 17.2% in July 2017 to July 2016. Real incomes of households grew 2.4% in the 1Q’2017, compared with the 1Q’2016. Real incomes grew 0.3% in 2016; Current account (CA) deficit in Jan-Jul 2017 was USD 2.2 bn (3.8% of GDP). Annual (Aug 2016 – Jul 2017) CA deficit was USD 4.6 bn (4.8% of GDP); Net FDI inflows in Jan-Jul 2017 were USD 1.3 bn. Net FDI inflows were USD 3.3 bn in 2016; In August gross international reserves (GIR) of NBU grew USD 0.2 bn, to USD 18.0 bn (3.6 m of import coverage) as of Sep 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; Surplus of consolidated budget in July 2017 was UAH 1 bn. It widened to UAH 53 bn as of Jan-Jul’2017. Deficit of consolidated budget in 2016 was 2.3% of GDP; Public and publicly guaranteed debt rose UAH 13 bn, to UAH 1 971 bn in July (in dollar terms, debt grew USD 1.0 bn, to USD 76 bn). It was UAH 1 930 bn (USD 71 bn), or 81.0% of GDP, as of Jan 1; In Aug M0 and monetary base declined 0.7% and 0.1% respectively. Annual growth of M0 and monetary base was moderate: 6.9% and 6.0% respectively; On Sep 14 NBU kept discount rate unchanged - 12.5%. Next NBU meeting will be on Oct 26.

GDP Real GDP, percent change from quarter one year ago Real GDP, percent change from preceding quarter GDP increased 2.3% in the 2Q’2017, compared with the 2Q’2016. Growth decelerated from 4.8% in the 4Q’2016; GDP grew 0.6% in the 2Q’2017, compared with the 1Q’2017, after decline 0.3% in the preceding quarter; 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 contraction diminished to 0.4% in Jan-Aug 2017, compared with Jan-Aug 2016; Industrial production grew 1.2% in August 2017 to August 2016, of which manufacturing – 5.6%. Electricity, gas, steam and conditioning air supply and mining industries contracted 2.8% and 6.8% 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 8.5% in Jan-Aug 2017, compared with Jan-Aug 2016. Growth was 8.7% in Jan-Jul 2017; Growth was in all transport subsectors, namely: pipelines - 17.3%, water transport - 11.6%, motor vehicles - 8.5%, aircraft - 8.0%, railway trains - 4.1%; 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 Aug 2017, compared with Aug 2016, was 23.6%; Construction rose 25.4% in Jan-Aug 2017, compared with Jan-Aug 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 In August agriculture renewed growth – 0.4% in Jan-Aug 2017, compared with Jan-Aug 2016. Crop production grew 1.0%, decline in animal production diminished to 0.7%; 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 grew 8.7% in Jan-Aug 2017, compared with Jan-Aug 2016. Retail trade turnover growth in Aug 2017, compared with Aug 2016, was 9.8%; 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 2.4% in the 1Q’2017 (compared with the 1Q’2016), after 1.0% decline in the 4Q’2016; Real incomes of households grew 0.3% in 2016, after 22.3% drop in 2015; Real wages increased 17.2% in July 2017, compared with July 2016; Real wages increased 19.7% in 1H’2017, compared with 1H’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 4.0 times more than demand in August (the lowest value at least since 2010), compared with 4.9 in July. The ratio fell due to decline of supply (from 319.9 to 311.9 th people) and simultaneous rise of demand (from 65.3 to 77.0 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation CPI declined 0.1% in August. Food prices declined 0.6%; Inflation, yoy % change CPI declined 0.1% in August. Food prices declined 0.6%; CPI growth to December of the preceding year was 8.1%; 12-m CPI growth accelerated to 16.2% as of July, compared with 15.9% as of July. 12-m CPI remains well below peak 60.9% in April 2015; PPI increased 0.4% in August. Prices in Mining industries and Manufacturing increased 4.7% and 1.2% respectively. Electricity, gas, steam and air-conditioning supply prices declined 3.7%; PPI growth to December of the preceding year was 8.4%; 12-m PPI accelerated to 23.6% as of August, compared with 23.3% as of July.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In July 2017 CA deficit was USD 594 m, compared with USD 429 m in July 2016; In Jan-Jul 2017 CA deficit was USD 2.2 bn (3.8% of GDP); Annual (Aug 2016 – Jul 2017) CA deficit was USD 4.6 bn (4.8% 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 July 2017 was USD 2.9 bn. It increased 9.9%, compared with July 2016; Import of goods in July 2017 was USD 4.0 bn. It increased 22.0%, compared with July 2016; The largest trade partner of Ukraine in Jan-Jul 2017 was EU. EU share in external goods turnover was 36.6%. Share of Russia was 11.4%.

Terms of trade index (prices) In July index value declined from 100.5 to 97.7. Value below 100 reflects negative terms of trade. Negative index value was due to more significant rise (compared with the same month of the previous year) of import prices (index value 111.1), than export prices (index value 108.5). Terms of trade index (physical volumes) In July index value increased from 85.2 to 88.6, but remains well below 100. Index value below 100 means negative terms of trade. Negative index value was due to more significant growth (compared with the same month of the previous year) of physical import volumes (index value 114.2), than physical export volumes (index value 101.2).

Foreign direct investments Net FDI , USD m Net FDI in July 2017 increased USD 137 m, of which USD 134 m – to real economy; Net FDI in Jan-Jul 2017 increased USD 1 293 m; 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 18.0 bn (3.6 months of import coverage) as of 1 Sep 2017, compared with USD 17.8 bn as of 1 Aug 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 August rose to USD 5.4 bn, compared with USD 4.9 bn month ago; GIR growth was caused mainly by allocation of T-bonds (USD 351.5 m) and interventions of NBU (USD 234.0 m). 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 Surplus of consolidated budget in July 2017 was UAH 0.7 bn; Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Surplus of consolidated budget in July 2017 was UAH 0.7 bn; Surplus of consolidated budget in Jan-Jul’2017 widened to UAH 53 bn (UAH 30 bn of which due to confiscation of Yanukovych’s funds in April); 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 July 2017 public and publicly guaranteed debt rose UAH 13 bn, to UAH 1 971 bn. In dollar terms, debt grew USD 1.0 bn, to USD 76.1 bn. Public and publicly guaranteed debt has risen UAH 41 bn (USD 5.1 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 September hryvnia depreciated moderately. Average USD/UAH from 1 to 25 of September was 26.05, compared with August 2017 average 25.64 (hryvnia depreciated 1.6% to US dollar); UAH appreciation to USD from September 2016 to September 2017 (average monthly rates as of September 25) was 0.9%; 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 Sep 14 NBU kept discount rate unchanged - 12.5%; Interest rate on overnight liquidity providing transactions remained 14.5% (discount rate + 2%); Interest rate on overnight certificates of deposit remained 10.5% (discount rate – 2%); Next NBU meeting on interest rates will be on Oct 26 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 August: Monetary base decreased UAH 0.5 bn, or 0.1%, to UAH 379.0 bn; M0 decreased UAH 2.2 bn, or 0.7%, to UAH 309.2 bn. Annual growth of monetary aggregates was moderate: Monetary base increased UAH 21.4 bn, or 6.0%; M0 increased 19.9 bn, or 6.9%.

Insolvent Banks (as of 25 Sep 2017) Number of banks classified insolvent No one bank has been recognized insolvent in September (as of Sep 25); 95 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 Gefest) are managed by provisional administrations; 89 banks are under liquidation procedures. 88 banks continue to operate in normal mode (as of Sep 25); 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 August hryvnia deposits decreased 0.3%, to UAH 214.0 bn. Annual (Sep 2016 – Aug 2017) growth was 13.0%; In August FX deposits increased 0.6%, to USD 8.4 bn. Annual (Sep 2016 – Aug 2017) decline was 3.9%. Corporate deposits, bn In August hryvnia deposits portfolio shrank 2.8%, to UAH 228.6 bn. Annual (Sep 2016 – Aug 2017) growth of deposit portfolio was 10.0%; In August FX deposits grew 1.8%, to USD 5.3 bn. Annual (Sep 2016 – Aug 2017) growth of deposit portfolio was 1.5%.

Credits Households credits, bn FX credit portfolio in August declined 1.3%, to USD 2.8 bn. Annual (Sep 2016 – Aug 2017) decline was 17.1%; Volume of FX credits declined 90%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio in August increased 4.1%, to UAH 87.4 bn. Annual (Sep 2016 – Aug 2017) growth of UAH credit portfolio was 16.6%. Corporate credits, bn In August FX credit portfolio was unchanged - USD 13.7 bn. Annual (Sep 2016 – Aug 2017) decline was 21.7%; In August UAH credit portfolio rose 1.3%, to UAH 447.9 bn. Annual (Sep 2016 – Aug 2017) increase of credit portfolio was 19.5%.