Macroeconomic Review September 2016

Summary GDP grew 1.4% in 2Q’2016 to 2Q’2015; In Jan-Aug 2016 all major branches (industrial production, transport, agriculture, retail trade and construction) grew. Growth in industrial production, construction and retail trade accelerated. Agriculture growth diminished to marginal 0.1%; 12-m CPI growth accelerated to 8.4% in August, compared with 7.9% month ago. 12-m PPI accelerated to 18.9% from 18.3% month ago; Unemployment rate in 2Q’2016 fell to 9.0% from 9.9% in 1Q’2016. Workforce supply/demand ratio fell to 6.6 in August, compared with 8.7 in July; Annual (August 2015 – July 2016) deficit of current account (CA) was USD 0.6 bn, or 0.7% of GDP. CA deficit in Jan-Jul 2016 was USD 0.5 bn, or 1.1% of GDP; Net FDI inflows were USD 2.3 bn in Jan-Jul 2016. Most of them were conversion of Ukrainian banks external debt into equity; Gross international reserves were USD 14.1 bn (3.6 m of import coverage) as of 1 Sep; 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 22.9 bn in Jan-Jul’2016, compared with surplus UAH 15.4 bn year ago. Public and publicly guaranteed debt was UAH 1 708 bn (USD 67 bn) as of 1 Sep; IMF USD 1 bn disbursement and related to it access to EU and US financial sources diminish current balance of payment and budget risks; Money supply growth remains moderate: annual increase of M0 and monetary base in August was 4.8% and 8.8% 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-Aug 2016 to Jan-Aug 2015 was 2.0%; Industrial production rebounded in August (compared with August 2015): growth was 3.4%, compared with contraction 0.2% and 3.4% in July and June respectively; The most remarkable growth in Jan-Aug 2016 was in Manufacturing – 3.3%. Growth in Electricity, gas, steam and conditioning air supply was 0.9%. Mining industries stalled – 0.0% growth in Jan-Aug 2016. Freight turnover, cumulative % change compared with the same period of the previous year Freight turnover growth in Jan-Aug 2016 to Jan-Aug 2015 remained unchanged - 1.1%. 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 (+15.7%). It was supported by motor vehicles and aircraft - 8.6% and 4.2% respectively. Freight turnover of railway trains and water transport continued to decline – 5.3% and 28.8% respectively.

Construction and agriculture Construction, cumulative % change compared with the same period of the previous year In Jan-Aug 2016 to Jan-Aug 2015 construction growth accelerated to 11.9%, compared with 11.0% month ago; Growth in August 2016 to August 2015 was 12.0%; Construction contraction in 2015 was 12.3%. Agriculture, cumulative % change compared with the same period of the previous year In January-August 2016 agriculture grew marginal 0.1%, compared with the same period of the previous year. Agriculture back to growth in July; 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 3.1% in Jan-Aug 2016, compared with the same period of the previous year. It was 2.4% in Jan-Jul 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 Decline of real incomes of households moderated to 14.9% in the 1Q’2016, compared with the 1Q’2015. The sharpest fall was 30.4% in the 2Q’2015; Real wages grew 6.1% in 1H’2016, compared with 1H’2015; Real wages grew 14.8% in July 2016, compared with July 2015; Remarkable improvement of real wages dynamics in last months was due to moderating inflation.

Unemployment rate, % ILO methodology Workforce supply to demand ratio Labor market 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 6.6 times more than demand in August, compared with 8.7 in July. The ratio fell due to increase of demand (from 42 to 54 th people) and decline of supply (from 370 to 356 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade). Unemployment rate, % ILO methodology Workforce supply to demand ratio

Inflation CPI declined 0.3% in August, of which food prices – 1.1%; Inflation, yoy % change CPI declined 0.3% in August, of which food prices – 1.1%; 12-m CPI growth accelerated to 8.4% as of August, compared with 7.9% as of July. 12-m CPI remains well below peak 60.9% in April 2015; PPI increased 0.2% in August. It was due to prices growth in Electricity, gas, steam and air-conditioning supply (2.0%) and in mining industries (1.8%). Prices in manufacturing declined 0.7%; 12-m PPI accelerated to 18.9%, compared with 18.3% as of July. 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 July CA deficit was USD 354 m, compared with surplus USD 37 m in July 2015; CA deficit in Jan-Jul 2016 was USD 538 m, or 1.1% of GDP. It widened moderately, compared with deficit USD 77 m (0.2% of GDP) in Jan-Jul 2015; Annual (Aug 2015 – Jul 2016) CA deficit was USD 637 m, or 0.7% of GDP. It was USD 246 m, or 0.3% of GDP, month ago. Trade in goods, 12-m sliding curve, USD bn In July 2016 to July 2015 export of goods declined 10.1% (to USD 2.7 bn). Decline was in all major export components, including agriculture; In July 2016 to July 2015 import of goods increased 1.4%, to USD 3.3 bn. Decline of energy import slowed to 28.1%, compared with 47.2% month ago. Non-energy import grew 10.8%; The largest trade partner of Ukraine in Jan-Jul 2016 was EU. EU share in external goods turnover was 35.5%. Share of Russia was 10.7%.

Terms of trade index (prices) In July index value declined again (from 102.5 to 100.9), but remained slightly above 100. Index values in May-July are the highest since April 2013. 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 96.6), than export prices (97.6). Terms of trade index (physical volumes) In July index value continued to decline (from 91.5 to 87.6). Index value below 100 means negative terms of trade. Negative changes were due to simultaneous decline (compared with the same month of the previous year) of physical export volumes (index value 93.2) and growth of physical import volumes (index value 106.4).

Foreign direct investments Net FDI , USD m Net FDI in July 2016 increased to USD 291 m; Net FDI in Jan-Jul 2016 were USD 2.3 bn, compared with USD 1.5 bn in Jan-Jul 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 14.103 bn as of 1 Sep 2016, compared with USD 14.082 bn as of 1 Aug 2016; GIR are equal to 3.6 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 were broadly unchanged in August – USD 3.4 bn as of 1 Sep 2016 (it was the same value as of 1 Aug 2016). 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-Jul 2016 deficit was UAH 22.9 bn, compared with surplus UAH 15.4 bn year ago; Deficit in July was UAH 11.6 bn. It is more than half of cumulative deficit since the start of the year.

Public and publicly guaranteed debt Nominal values, bn % of GDP Public and publicly guaranteed debt increased from 69.4% to 79.4% of GDP during 2015. Increase in 2015 (+10.0% 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-Aug’2016 public and publicly guaranteed debt grew from UAH 1 572 bn to UAH 1 708 bn. At the same time, debt grew from USD 65.5 bn to USD 67.0 bn. Current level of Debt/GDP ratio broadly coincides with World average-2015 (81.3%). The ratio is much less than average for advanced economies (105.8%), but at the same time much higher than average for emerging markets (45.4%).

Monetary policy: rate of exchange and interest rates USD/UAH official exchange rate USD/UAH average official exchange rate from 1 to 26 of September was 26.33 (hryvnia depreciated 4.8%, compared with August average values); USD/UAH volatility increased significantly. USD/UAH reached 26.85 in the first decade of September, compared with 24.80 level in the mid of July. In the second decade of September hryvnia restored to about 26.00 (due to IMF USD 1 bn disbursement and renewed access to US and EU financial sources); UAH depreciation to USD, compared with average Dec-2015 rates, was 11.1%. 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 August: M0 decreased UAH 3.4 bn, or 1.1%, to UAH 289.5 bn; Monetary base increased UAH 3.0 bn, or 0.8%, to UAH 357.6 bn. Annual (September 2015 – August 2016) growth of monetary base was UAH 28.9 bn, or 8.8%. At the same period, M0 increased UAH 13.2 bn, or 4.8%.

Insolvent Banks (as of 26 Sep 2016) Number of banks classified insolvent 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; 4 banks are managed by provisional administrations; 75 banks are under liquidation procedures. 17 banks have been recognized insolvent or decided to leave the market since the start of the year; One bank (KSG) has been recognized insolvent since 25 Aug 2016 (previous report date); Sep 22 owners of Finexbank decided to liquidate their bank, but it still operates in normal mode. 100 banks continue to work in normal mode (as of Sep 26).

Households deposits, bn In August hryvnia deposits decreased 1.8%, to UAH 189.3 bn. Growth since the start of the year was 0.6%; In August FX deposits portfolio grew 0.6%. Growth since the start of the year was 0.1%. Corporate deposits, bn In August hryvnia deposits decreased 2.6%, to UAH 208.0 bn. Deposit portfolio in Jan-Aug 2016 grew 2.4%; In August FX deposits increased 1.7%, to USD 5.3 bn. Growth since the start of the year was 15.7%.

Credits Households credits, bn FX credit portfolio in August declined 1.3%, to USD 3.3 bn. Decline since the start of the year was 13.9%, annual decline – 28.0%; Volume of FX credits declined 88%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio increased UAH 0.8 bn (or 1.1%), to UAH 74.4 bn in August. UAH credit portfolio decline since the start of the year was 4.1%, annual decline – 24.3%. Corporate credits, bn In August FX credit portfolio declined USD 0.5 bn (or 2.7%), to USD 17.5 bn. Decline since the start of the year was 7.6%, annual decline - 16.4%; In August UAH credit portfolio increased UAH 20.5 bn (or 5.8%), to UAH 374.9 bn. Increase since the start of the year was 6.3%. Annual decline of UAH credit portfolio - 4.2%.