Macroeconomic Review December 2017

Summary Real GDP increased 2.1% in the 3Q’2017, compared with the 3Q’2016; In November construction, retail trade and transport growth continued slowing. Industrial production decline diminished to marginal (0.1% as of Jan-Nov). Agriculture contraction deepened to 2.8%; 12-m CPI decelerated to 13.6% in November, compared with 14.6% month ago. It exceeds significantly inflation target for 2017 – 8.0%. 12-m PPI decelerated to 18.4% from 18.8% month ago; Unemployment rate in the 3Q’2017 declined to 8.9% from 9.1% in the 2Q’2017. Workforce supply/demand ratio grew to 4.6 in November, compared with 3.9 (the lowest value at least since 2010) in October; Real wages grew 19.9% in October 2017 to October 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-Oct 2017 was USD 3.3 bn (3.7% of GDP). Annual (Nov 2016 – Oct 2017) CA deficit was USD 3.8 bn (3.7% of GDP); Net FDI inflows in Jan-Oct 2017 were USD 2.1 bn. Net FDI inflows were USD 3.3 bn in 2016; In November gross international reserves (GIR) of NBU grew USD 0.2 bn, to USD 18.9 bn (3.7 m of import coverage) as of Dec 1; In the 3Q’2017 external debt grew USD 2 bn, to USD 117 bn. External debt declined USD 25 bn from peak USD 142 bn at the end of 2013; Deficit of consolidated budget in October 2017 was UAH 10 bn. Surplus of consolidated budget narrowed to UAH 31 bn in Jan-Oct 2017, compared with UAH 42 bn in Jan-Sep’2017. Deficit of consolidated budget in 2016 was 2.3% of GDP; Public and publicly guaranteed debt grew UAH 4 bn, to UAH 2 047 bn in October (in dollar terms, debt declined USD 0.8 bn, to USD 76 bn). It was UAH 1 930 bn (USD 71 bn), or 81.0% of GDP, as of Jan 1; In Nov M0 and monetary base grew 0.7% and 0.6% respectively. Annual growth of M0 and monetary base was 7.2% and 5.9% respectively; On Dec 14 NBU raised discount rate from 13.5% to 14.5% due to high inflation. Next NBU meeting will be on Jan 25.

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 0.1% in Jan-Nov 2017, compared with Jan-Nov 2016; Industrial production rose 0.3% in November 2017 to November 2016, of which Manufacturing – 3.0%. Mining industries and Electricity, gas, steam and conditioning air supply contracted 2.8% and 6.4% 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 6.1% in Jan-Nov 2017, compared with Jan-Nov 2016. Growth was 6.9% in Jan-Oct 2017; Growth was in all transport subsectors, namely: aircraft - 19.2%, pipelines - 13.0%, motor vehicles - 8.8%, water transport - 7.7%, railway trains - 2.0%; 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 Nov 2017, compared with Nov 2016, was 10.7%; Construction rose 22.5% in Jan-Nov 2017, compared with Jan-Nov 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 2.8% in Jan-Nov 2017, compared with Jan-Nov 2016 (from 2.3% in Jan-Oct 2017). Crop production contracted 3.8%, decline in animal production was 0.3%; 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 8.0% in Jan-Nov 2017, compared with Jan-Nov 2016. Retail trade turnover growth in Nov 2017, compared with Nov 2016, was 6.8%; 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 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 19.9% in October 2017, compared with October 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 3Q’2017: Unemployment rate was 8.9%; Civilian labor force was 18.0 m persons, of which unemployed persons – 1.6 m; Participation rate was 62.6%; Employment-population ratio was 57.0%. Workforce supply was 4.6 times more than demand in November, compared with 3.9 (the lowest value at least since 2010) in October. The ratio grew due to increase of unemployed persons (from 282 to 309 th people) and decline of open vacancies (from 73 to 68 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation, yoy % change Inflation targeting CPI grew 0.9% in November. Food prices grew 0.9%; CPI growth to December of the preceding year was 12.5%; 12-m CPI growth decelerated to 13.6% as of November, compared with 14.6% as of October. It exceeds significantly inflation target for 2017 – 8.0%; PPI increased 1.8% in November. Prices in Mining industries and Manufacturing increased 8.9% and 1.0% respectively. Electricity, gas, steam and air-conditioning supply prices grew 0.8%; PPI growth to December of the preceding year was 14.6%; 12-m PPI decelerated to 18.4% as of November, compared with 18.8% as of October.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In October 2017 CA deficit was USD 408 m, compared with USD 180 m in October 2016; In Jan-Oct 2017 CA deficit was USD 3.3 bn (3.7% of GDP); Annual (Nov 2016 – Oct 2017) CA deficit was USD 3.8 bn (3.7% 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 October 2017 was USD 3.5 bn. It increased 16.7%, compared with October 2016; Import of goods in October 2017 was USD 4.5 bn. It increased 22.4%, compared with October 2016; The largest trade partner of Ukraine in Jan-Oct 2017 was EU. EU share in external goods turnover was 36.6%. Share of Russia was 11.6%.

Terms of trade index (prices) In October index value rose from 100.5 to 101.6. Index value remains 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 116.3) and import prices (index value 114.5). Terms of trade index (physical volumes) In October index value continued decline - from 95.5 to 91.9. 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 111.6), than physical export volumes (index value 102.5).

Foreign direct investments Net FDI , USD m Net FDI in October 2017 increased USD 65 m, 97% of which – to real economy; Net FDI in Jan-Oct 2017 increased USD 2.1 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 18.9 bn (3.7 months of import coverage) as of 1 Dec 2017, compared with USD 18.7 bn as of 1 Nov 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 November rose to USD 6.7 bn, compared with USD 6.1 bn month ago; GIR growth was supported by allocation of USD 664 m dollar denominated T-bills. Repayments to IMF (USD 447 m) limited GIR growth. External Debt, eop USD bn In the 3Q’2017 external debt grew USD 2.4 bn, to USD 117.4 bn; External debt grew USD 1.2 bn during last year (4Q’2016 – 3Q’2017); External debt declined USD 24.7 bn, compared with the historical maximum level (USD 142.1 bn as of 1 Jan 2014).

Budget Deficit of consolidated budget in October 2017 was UAH 10.4 bn; Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Deficit of consolidated budget in October 2017 was UAH 10.4 bn; Surplus of consolidated budget in Jan-Oct’2017 narrowed to UAH 31 bn, compared with UAH 42 bn in Jan-Sep’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 October 2017 public and publicly guaranteed debt grew UAH 4 bn, to UAH 2 047 bn. In dollar terms, debt declined USD 0.8 bn, to USD 76.3 bn. Public and publicly guaranteed debt has risen UAH 117 bn (USD 5.3 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 December (from 1 to 27 of Dec) average USD/UAH was 27.44, compared with November average 26.71. Hryvnia depreciated 2.7%; UAH depreciation to USD from December 2016 to December 2017 (average monthly rates as of December 24) was 4.5%; 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 Dec 14 NBU raised discount rate from 13.5% to 14.5% due to high inflation risks. Current inflation level (13.6%) exceeds inflation target (8%) for 2017 significantly; Interest rate on overnight liquidity providing transactions raised from 15.5% to 16.5% (discount rate + 2%); Interest rate on overnight certificates of deposit raised from 11.5% to 12.5% (discount rate – 2%); Next NBU meeting on interest rates will be on Jan 25 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 November: Monetary base grew UAH 2.1 bn, or 0.6%, to UAH 378.7 bn; M0 grew UAH 2.1 bn, or 0.7%, to UAH 310.4 bn. Annual growth of monetary aggregates remained moderate: Monetary base increased UAH 21.2 bn, or 5.9%; M0 increased 21.0 bn, or 7.2%.

Insolvent Banks (as of 27 Dec 2017) Number of banks classified insolvent (or leaving the market by decisions of their owners) In December 3 banks left the market. One of them (Express Bank) was joined to Industrialbank. Owners of two other banks (Apeks and PFB) decided to reorganize them as non bank legal entities. 100 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; 2 banks (Unison and Finansova Iniciatyva) are managed by provisional administrations; 92 banks are under liquidation procedures. 83 banks continue to operate in normal mode (as of Dec 27); After Privatbank recapitalization, market share of government controlled banks increased to 55.2% (as of 1 Oct 2017), share of subsidiaries of foreign banking groups was 30.9%. Market share of other banks declined to 13.9%.

Households deposits, bn In November hryvnia deposits increased 2.1%, to UAH 222.1 bn. Annual (Dec 2016 – Nov 2017) growth was 14.3%; In November FX deposits increased 0.2%, to USD 8.4 bn. Annual (Dec 2016 – Nov 2017) decline was 3.0%. Corporate deposits, bn In November hryvnia deposits portfolio declined 1.3%, to UAH 228.8 bn. Annual (Dec 2016 – Nov 2017) growth of deposit portfolio was 6.5%; In November FX deposits declined 2.2%, to USD 5.2 bn. Annual (Dec 2016 – Nov 2017) growth of deposit portfolio was 7.2%.

Credits Households credits, bn FX credit portfolio in November declined 9.0%, to USD 2.4 bn. Annual (Dec 2016 – Nov 2017) decline was 24.4%; Volume of FX credits declined 91%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio in November increased 2.7%, to UAH 94.7 bn. Annual (Dec 2016 – Nov 2017) growth of UAH credit portfolio was 26.0%. Corporate credits, bn In November FX credit portfolio declined 0.1%, to USD 13.7 bn. Annual (Dec 2016 – Nov 2017) decline was 10.2%; In November UAH credit portfolio rose 0.3%, to UAH 457.3 bn. Annual (Dec 2016 – Nov 2017) increase of credit portfolio was 5.2%.