Macroeconomic Review October 2016

Summary GDP grew 1.4% in 2Q’2016 to 2Q’2015; In Jan-Sep 2016 all major branches grew. Growth in construction, agriculture and retail trade accelerated. Growth in industrial production and transport slowed slightly; 12-m CPI growth slowed to 7.9% in September, compared with 8.4% month ago. 12-m PPI accelerated to 19.6% from 18.9% month ago; Unemployment rate in 2Q’2016 fell to 9.0% from 9.9% in 1Q’2016. Workforce supply/demand ratio fell to 6.0 in September, compared with 6.6 in August; Real wages grew 15.4% in August 2016 to August 2015. Real incomes of households grew 5.6% in 2Q’2016, compared with 2Q’2015; In August 2016 to August 2015 import of goods increased 14.9%, non-energy import – 25.4%. Export of goods increased only 1.0%. Strong growth of wages not supported by sufficient economic growth can cause further pressure on trade balance (and CPI); Annual (September 2015 – August 2016) deficit of current account (CA) was USD 1.5 bn, or 1.7% of GDP. CA deficit in Jan-Aug 2016 was USD 1.4 bn, or 2.4% of GDP; Net FDI inflows were USD 2.5 bn in Jan-Aug 2016. Most of them were conversion of Ukrainian banks external debt into equity; Gross international reserves were USD 15.6 bn (3.9 m of import coverage) as of 1 Oct; External debt declined to USD 115 bn at the end of 2Q’2016, compared with USD 117 bn at the end of 1Q’2016 and peak USD 142 bn at the end of 2013; Deficit of consolidated budget was UAH 11.3 bn in Jan-Aug’2016, compared with surplus UAH 28.3 bn year ago. Public and publicly guaranteed debt was UAH 1 778 bn (USD 69 bn) as of 1 Oct; Money supply growth remains moderate: annual increase of M0 and monetary base in September was 8.0% and 10.6% respectively; NBU cut discount rate from 15.5% to 15.0% in September. Next NBU meeting will be on October 27.

GDP GDP grew 1.4% in 2Q’2016, compared with 2Q’2015; GDP, % change compared with the same quarter of the previous year GDP, % change compared with the previous quarter GDP grew 1.4% in 2Q’2016, compared with 2Q’2015; GDP grew 0.6% in 2Q’2016, compared with 1Q’2016. Growth restored after 0.7% contraction 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 Jan-Sep 2016 to Jan-Sep 2015 was 2.0%; Industrial production growth in September (compared with September 2015) moderated to 2.0%, compared with 3.4% month ago; The most remarkable growth in Jan-Sep 2016 was in Manufacturing – 3.5%. Growth in Electricity, gas, steam and conditioning air supply was 1.3%. Mining industries contracted 0.6%. Freight turnover, cumulative % change compared with the same period of the previous year Freight turnover growth in Jan-Sep 2016 to Jan-Sep 2015 slowed to 1.0% from 1.1% in Jan-Aug 2016. Growth slowed moderately compared with 2.4% in the 1H’2016 and 4.2% in the 1Q’2016; The fastest growth of freight turnover was in pipelines (+15.2%). It was supported by motor vehicles and aircraft - 9.0% and 2.4% respectively. Freight turnover of railway trains and water transport continued to decline – 5.3% and 28.1% respectively.

Construction and agriculture Construction, cumulative % change compared with the same period of the previous year In Jan-Sep 2016 to Jan-Sep 2015 construction growth accelerated to 13.2%, compared with 11.9% month ago; Growth in September 2016 to September 2015 was 15.3%; Construction contraction in 2015 was 12.3%. Agriculture, cumulative % change compared with the same period of the previous year In January-September 2016 agriculture growth accelerated to 0.9%, compared with the same period of the previous year. It was 0.1% growth in January-August; 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 accelerated to 3.3% in Jan-Sep 2016, compared with the same period of the previous year. It was 3.1% in Jan-Aug 2016; Since March, growth levels, compared with the same periods of the previous year, are broadly stable around 2-3%; Retail trade decline was 20.7% in 2015. Households real income, % change compared with the same quarter of the previous year Real incomes of households reversed from decline 14.9% in the 1Q’2016 (compared with the 1Q’2015), to 5.6% growth in the 2Q’2016; Real wages grew 7.3% in Jan-Jul’2016, compared with Jan-Jul’2015; Real wages grew 15.4% in August 2016, compared with August 2015; Remarkable improvement of real incomes dynamics in last months was due to moderating inflation.

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 2Q’2016: Unemployment rate was 9.0%; Civilian labor force was 18.0 m persons, of which unemployed persons – 1.6 m; Participation rate was 62.4%; Employment-population ratio was 56.9%. Workforce supply was 6.0 times more than demand in September, compared with 6.6 in August. The ratio fell due to increase of demand (from 54 to 57 th people) and decline of supply (from 356 to 342 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation CPI increased 1.8% in September. Food prices grew 0.3%; Inflation, yoy % change CPI increased 1.8% in September. Food prices grew 0.3%; 12-m CPI growth slowed to 7.9% as of September, compared with 8.4% as of August. 12-m CPI remains well below peak 60.9% in April 2015; PPI increased 2.6% in September. The most significant price growth was in mining industries – 8.3%. Prices in manufacturing and Electricity, gas, steam and air-conditioning supply grew 2.1% and 1.3% respectively; 12-m PPI accelerated to 19.6%, compared with 18.9% as of August. 12-m PPI remains well below peak 51.7% as of March 2015.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In August CA deficit was USD 414 m, compared with surplus USD 38 m in August 2015; CA deficit in Jan-Aug 2016 was USD 1 375 m, or 2.4% of GDP. It widened moderately, compared with deficit USD 18 m (0.03% of GDP) in Jan-Aug 2015; Annual (Sep 2015 – Aug 2016) CA deficit was USD 1 546 m, or 1.7% of GDP. It was USD 1 094 m, or 1.2% of GDP, month ago. Trade in goods, 12-m sliding curve, USD bn In August 2016 to August 2015 export of goods increased 1.0% (to USD 3.0 bn); In August 2016 to August 2015 import of goods increased 14.9%, to USD 3.7 bn. Decline of energy import slowed to 15.2%, compared with 27.3% month ago. Non-energy import grew 25.4%; The largest trade partner of Ukraine in Jan-Aug 2016 was EU. EU share in external goods turnover was 35.0%. Share of Russia was 10.8%.

Terms of trade index (prices) In August index value increased from 100.9 to 104.5. Value above 100 reflects positive terms of trade. High index value was due to faster decline (compared with the same month of the previous year) of import prices (index value 95.3), than export prices (99.6). Terms of trade index (physical volumes) In August index value continued steep decline. It fell from 87.6 to 81.1. Index value below 100 means negative terms of trade. It is the worst value since 2011. Negative changes were due to fast growth (compared with the same month of the previous year) of physical import volumes (index value 125.9) and simultaneously relatively stable exports (index value 102.2).

Foreign direct investments Net FDI , USD m Net FDI in August 2016 increased USD 129 m. Most of them were allocated to real sector of economy; Net FDI in Jan-Aug 2016 were USD 2.5 bn, compared with USD 2.1 bn in Jan-Aug 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 International Reserves, months of import coverage Gross international reserves (GIR) of NBU rose to USD 15.6 bn as of 1 Oct 2016, compared with USD 14.1 bn as of 1 Sep 2016. Increase was due to IMF tranche USD 1 bn and issue of USD 1 bn bonds guaranteed by US; GIR are equal to 3.9 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 September increased to USD 3.8 bn, compared with USD 3.4 bn month ago. External Debt, eop USD bn External debt declined to USD 115.0 bn at the end of the 2Q’2016, compared with USD 117.4 bn at the end of the 1Q’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 declined from UAH 72 bn to UAH 31 bn in 2015, or from 4.5% to 1.6% of GDP; In Jan-Aug 2016 deficit was UAH 11.3 bn, compared with surplus UAH 28.3 bn year ago; Surplus in August was UAH 11.6 bn.

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-Sep’2016 public and publicly guaranteed debt grew from UAH 1 572 bn to UAH 1 778 bn. At the same time, debt grew from USD 65.5 bn to USD 68.6 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 USD/UAH average official exchange rate from 1 to 25 of October was 25.80. Hryvnia appreciated 1.8%, compared with September average values; Hryvnia appreciates steadily since IMF disbursement of USD 1 bn and renewed access to US and EU financial sources. As of 25 Oct, hryvnia appreciated 4.7%, compared with lowest value (26.85), reached on Sep 7; UAH depreciation to USD, compared with average Dec-2015 rates, was 9.3%. NBU discount rate On Sep 15 NBU cut discount rate to 15.0% due to diminished inflation risks. Last change of discount rate (cut from 16.5% to 15.5%) was in July 2016; NBU plans further gradual monetary policy easing if inflation risks continue to fall; Interest rate on overnight liquidity providing transactions cut from 17.5% to 17.0% (discount rate + 2%); Interest rate on overnight certificates of deposit cut from 14.0% to 13.0% (discount rate – 2%); Next NBU meeting on interest rates will be on Oct 27.

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 September: M0 increased UAH 3.7 bn, or 1.3%, to UAH 292.9 bn; Monetary base decreased UAH 2.5 bn, or 0.7%, to UAH 355.2 bn. Annual (October 2015 – September 2016) growth of monetary base was UAH 34.0 bn, or 10.6%. At the same period, M0 increased UAH 21.8 bn, or 8.0%.

Insolvent Banks (as of 25 Oct 2016) Number of banks classified insolvent No one bank has been recognized insolvent since Aug 30 (Sep 22 owners of Finexbank decided to liquidate their bank, but it is still no official information it stopped to work in normal mode); 17 banks have been recognized insolvent or decided to leave the market since the start of the year; 83 banks have been recognized insolvent by the NBU Resolutions or decided to leave the market since 01.01.2014, of which: 1 bank (Astra) has been sold to private investors; 3 banks (Rodovid, Unison, Finansova Iniciatyva) are managed by provisional administrations; 76 banks are under liquidation procedures. 100 banks continue to work in normal mode (as of Oct 25).

Households deposits, bn In September hryvnia deposits increased 1.7%, to UAH 192.7 bn. Growth since the start of the year was 2.4%; In September FX deposits portfolio decreased 0.2%. Deposit portfolio was broadly unchanged since the start of the year (about USD 8.8 bn). Corporate deposits, bn In September hryvnia deposit portfolio was broadly unchanged (about UAH 208.0 bn). Deposit portfolio in Jan-Sep 2016 grew 2.3%; In September FX deposits decreased 1.8%, to USD 5.1 bn. Growth since the start of the year was 12.5%.

Credits Households credits, bn FX credit portfolio in September declined 1.1%, to USD 3.3 bn. Decline since the start of the year was 15.0%, annual decline – 20.5%; Volume of FX credits declined 88%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio decreased UAH 0.4 bn (or 0.5%), to UAH 74.5 bn in September. UAH credit portfolio decline since the start of the year was 4.1%, annual decline – 6.8%. Corporate credits, bn In September FX credit portfolio declined USD 0.1 bn (or 0.4%), to USD 17.4 bn. Decline since the start of the year was 8.1%, annual decline - 13.3%; In September UAH credit portfolio increased UAH 7.4 bn (or 2.0%), to UAH 382.1 bn. Increase since the start of the year was 8.3%, annual increase - 0.3%.