Macroeconomic Review October 2017

Summary Real GDP increased 2.3% in the 2Q’2017, compared with the 2Q’2016; In September construction, transport and retail trade continued to grow. Agriculture declined again, after one month of growth in August. Industrial production contracted marginal 0.3% (as of Jan-Sep 2017); 12-m CPI accelerated to 16.4% in September, compared with 16.2% month ago. It exceeds significantly inflation target for 2017 – 8.0%. 12-m PPI decelerated to 22.4% from 23.6% month ago; Unemployment rate in the 2Q’2017 declined to 9.1% from 10.1% in the 1Q’2017. Workforce supply/demand ratio rose marginally to 4.1 in September, compared with 4.0 in August (the lowest value at least since 2010); Real wages grew 17.2% in August 2017 to August 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-Aug 2017 was USD 2.1 bn (3.1% of GDP). Annual (Sep 2016 – Aug 2017) CA deficit was USD 3.8 bn (3.9% of GDP); Net FDI inflows in Jan-Aug 2017 were USD 1.8 bn. Net FDI inflows were USD 3.3 bn in 2016; In September gross international reserves (GIR) of NBU grew USD 0.6 bn, to USD 18.6 bn (3.7 m of import coverage) as of Oct 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 August 2017 was UAH 16 bn. It widened to UAH 69 bn as of Jan-Aug’2017. Deficit of consolidated budget in 2016 was 2.3% of GDP; Public and publicly guaranteed debt declined UAH 13 bn, to UAH 1 958 bn in August (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 Sep M0 and monetary base declined 0.6% and 1.5% respectively. Annual growth of M0 and monetary base slowed to 4.8% and 5.1% 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 2.3% 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 contracted 0.3% in Jan-Sep 2017, compared with Jan-Sep 2016; Industrial production contracted 0.3% in September 2017 to September 2016, of which Electricity, gas, steam and conditioning air supply – 3.4%, mining industries – 2.8%. Manufacturing grew 1.2%; 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 8.1% in Jan-Sep 2017, compared with Jan-Sep 2016. Growth was 8.5% in Jan-Aug 2017; Growth was in all transport subsectors, namely: pipelines - 18.0%, aircraft - 15.5%, water transport - 12.1%, motor vehicles - 7.5%, railway trains - 3.2%; 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 Sep 2017, compared with Sep 2016, was 10.2%; Construction rose 23.8% in Jan-Sep 2017, compared with Jan-Sep 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 September agriculture contracted again – 0.7% in Jan-Sep 2017, compared with Jan-Sep 2016. Crop production contracted 0.8%, decline in animal production was 0.6%; 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 8.8% in Jan-Sep 2017, compared with Jan-Sep 2016. Retail trade turnover growth in Sep 2017, compared with Sep 2016, was 8.1%; 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 17.2% in August 2017, compared with August 2016; Real wages increased 19.3% in Jan-Jul 2017, compared with Jan-Jul 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 4.1 times more than demand in September, compared with 4.0 in August (the lowest value at least since 2010). The ratio rose marginally due to decline of demand (from 77.0 to 73.4 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation, yoy % change Inflation targeting CPI grew 2.0% in September. Food prices grew 2.0%; CPI growth to December of the preceding year was 10.2%; 12-m CPI growth accelerated to 16.4% as of September, compared with 16.2% as of August. It exceeds significantly inflation target for 2017 – 8.0%; PPI increased 1.6% in September. Prices in Mining industries and Manufacturing increased 4.8% and 2.0% respectively. Electricity, gas, steam and air-conditioning supply prices declined 1.1%; PPI growth to December of the preceding year was 10.1%; 12-m PPI decelerated to 22.4% as of September, compared with 23.6% as of August.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In August 2017 CA deficit was USD 226 m, compared with USD 490 m in August 2016; In Jan-Aug 2017 CA deficit was USD 2.1 bn (3.1% of GDP); Annual (Sep 2016 – Aug 2017) CA deficit was USD 3.8 bn (3.9% 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 August 2017 was USD 3.3 bn. It increased 12.8%, compared with August 2016; Import of goods in August 2017 was USD 4.2 bn. It increased 10.4%, compared with August 2016; The largest trade partner of Ukraine in Jan-Aug 2017 was EU. EU share in external goods turnover was 36.6%. Share of Russia was 11.5%.

Terms of trade index (prices) In August index value rose from 97.7 to 98.9. Index value is close to 100 and reflects “neutral” terms of trade. Index value was formed due to simultaneous growth (compared with the same month of the previous year) of import prices (index value 111.5) and export prices (index value 110.3). Terms of trade index (physical volumes) In August index value rose significantly - from 88.6 to 100.8. Index value is close to 100 and reflects “neutral” terms of trade. Index value was formed due to simultaneous growth (compared with the same month of the previous year) of physical export volumes (index value 104.7) and physical import volumes (index value 103.9).

Foreign direct investments Net FDI , USD m Net FDI in August 2017 increased USD 194 m, of which USD 164 m – to real economy; Net FDI in Jan-Aug 2017 increased USD 1.8 bn (75% of which – to real economy); 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 18.6 bn (3.7 months of import coverage) as of 1 Oct 2017, compared with USD 18.0 bn as of 1 Sep 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 September rose to USD 6.1 bn, compared with USD 5.5 bn month ago; GIR growth was caused mainly by allocation of USD 3 bn Eurobonds, USD 1.3 bn of which affected GIR. Payments on government debt (USD 0.5 bn) and NBU interventions (USD 0.2 bn) 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 Surplus of consolidated budget in August 2017 was UAH 15.8 bn; Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Surplus of consolidated budget in August 2017 was UAH 15.8 bn; Surplus of consolidated budget in Jan-Aug’2017 widened to UAH 69 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 August 2017 public and publicly guaranteed debt declined UAH 13 bn, to UAH 1 958 bn. In dollar terms, debt grew USD 0.5 bn, to USD 76.6 bn. Public and publicly guaranteed debt has risen UAH 29 bn (USD 5.6 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 October hryvnia depreciated moderately. Average USD/UAH from 1 to 25 of October was 26.61, compared with September 2017 average 26.11 (hryvnia depreciated 1.9% to US dollar); UAH appreciation to USD from October 2016 to October 2017 (average monthly rates as of October 25) was 3.2%; 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 (16.4%) exceeds inflation target (8%) by 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 September: Monetary base decreased UAH 5.6 bn, or 1.5%, to UAH 373.4 bn; M0 decreased UAH 1.9 bn, or 0.6%, to UAH 306.9 bn. Annual growth of monetary aggregates was moderate and continued to slow: Monetary base increased UAH 18.2 bn, or 5.1%; M0 increased 14.2 bn, or 4.8%.

Insolvent Banks (as of 25 Oct 2017) Number of banks classified insolvent No one bank has been recognized insolvent since Aug 1 (as of Oct 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; 3 banks (Rodovid, Unison and Finansova Iniciatyva) are managed by provisional administrations; 90 banks are under liquidation procedures. 88 banks continue to operate in normal mode (as of Oct 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 September hryvnia deposits increased 1.6%, to UAH 217.6 bn. Annual (Oct 2016 – Sep 2017) growth was 12.8%; In September FX deposit portfolio was broadly stable at USD 8.4 bn. Annual (Oct 2016 – Sep 2017) decline was 3.7%. Corporate deposits, bn In September hryvnia deposits portfolio increased 0.7%, to UAH 230.0 bn. Annual (Oct 2016 – Sep 2017) growth of deposit portfolio was 10.8%; In September FX deposits grew 1.9%, to USD 5.5 bn. Annual (Oct 2016 – Sep 2017) growth of deposit portfolio was 6.2%.

Credits Households credits, bn FX credit portfolio in September declined 2.4%, to USD 2.7 bn. Annual (Oct 2016 – Sep 2017) decline was 18.2%; Volume of FX credits declined 90%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio in September increased 1.5%, to UAH 88.8 bn. Annual (Oct 2016 – Sep 2017) growth of UAH credit portfolio was 18.5%. Corporate credits, bn In September FX credit portfolio declined 1.4%, to USD 13.5 bn. Annual (Oct 2016 – Sep 2017) decline was 21.8%; In September UAH credit portfolio rose 1.4%, to UAH 454.0 bn. Annual (Oct 2016 – Sep 2017) increase of credit portfolio was 19.2%.