1. Macroeconomic Review
February 2018

2. Summary
Real GDP increased 1.8% in the 4Q’2017, compared with the 4Q’2016. GDP growth in 2017 was 2.1% (preliminary estimate of NBU);
Retail trade, industrial production and agriculture grew in Jan 2018 (compared with Jan 2017). Construction declined modest 1%. Transport fell sharply (9.3%) due to significant decline of gas and oil transit;
Annual CPI growth accelerated to 14.1% in Jan 2018, compared with 13.7% in Dec It exceeds significantly inflation target for 2018 – 6.0%. Annual PPI growth accelerated to 22.0% from 16.5%;
Unemployment rate in the 3Q’2017 declined to 8.9% from 9.1% in the 2Q’2017. Workforce supply/demand ratio seasonally grew to 7.0 in December, compared with 4.6 in November;
Real wages grew 19.1% in Real incomes of households grew 0.2% in the 3Q’2017, compared with the 3Q’2016. Real incomes grew 0.8% in 2016;
Current account (CA) deficit in 2017 was USD 3.8 bn (3.5% of GDP), compared with USD 3.5 bn (3.7% of GDP) in 2016;
Net FDI inflows in 2017 declined to USD 2.3 bn, from USD 3.3 bn in 2016;
In January gross international reserves (GIR) of NBU declined USD 0.4 bn, to USD 18.4 bn (3.5 m of import coverage) as of Feb 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 December 2017 was UAH 76 bn. It exceeds deficit of consolidated budget of total 2017 – UAH 42 bn (or 1.4% of GDP – preliminary estimate). Deficit of consolidated budget in 2016 was UAH 55 bn, or 2.3% of GDP;
Public and publicly guaranteed debt rose UAH 212 bn, to UAH bn in 2017 (in dollar terms, debt rose USD 5.3 bn, to USD 76.3 bn). It is equal to 73.1% of GDP (preliminary estimate);
In Jan M0 and monetary base decreased 3.3% and 1.7% respectively. In spite of this, annual growth of M0 and monetary base accelerated to 9.1% and 8.4% respectively;
On Jan 25 NBU raised discount rate from 14.5% to 16.0% due to high inflation. Next NBU meeting will be on Mar 1.

3. GDP
Real GDP, percent change from quarter one year ago
Real GDP, percent change from preceding quarter
GDP increased 1.8% in the 4Q’2017, compared with the 4Q’2016. Growth decelerated from 4.8% in the 4Q’2016;
GDP grew 0.4% in the 4Q’2017, compared with the 3Q’2017;
Real GDP increased 2.3% in 2016*;
GDP decline in 2015 was 9.8%. It was 6.6% in 2014.
* NBU estimates preliminary that GDP growth in 2017 was 2.1%.

4. Industrial production and transport
Industrial production, cumulative percent change from the same period one year ago
Industrial production rose 3.6% in Jan 2018, compared with Jan 2017;
January growth was generated in Manufacturing – 9.7%. Mining industries declined marginal 0.2%. Electricity, gas, steam and conditioning air supply contracted 8.1%;
Industrial production in 2017 was revised to growth 0.4%, from decline 0.1% according to initial estimate.
Freight turnover, cumulative percent change from the same period one year ago
Freight turnover fell 9.3% in Jan 2018, compared with Jan 2017;
Steep decline of freight turnover was caused by 29.4% contraction in pipelines subsector. Railway transportation declined 3.3%. Other subsectors continued growth, namely: water transport %, aircraft %, motor vehicles -22.2%,
Freight turnover growth in 2017 was 5.9%.

5. Construction and agriculture
Construction, cumulative percent change from the same period one year ago
Construction declined 1.0% in Jan 2018, compared with Jan 2017;
Construction rose 26.3% in 2017, compared with 2016;
Construction growth in 2016 was 17.4%.
Agriculture, cumulative percent change from the same period one year ago
Agriculture rose 1.1% in Jan 2018, compared with Jan 2017;
Agriculture contracted 2.7% in 2017, compared with Crop production contracted 3.6%, decline in animal production was 0.4%;
Agriculture grew 6.1% in 2016, of which crop production grew 9.7%, animal production declined 2.6%.

6. Retail trade and households incomes
Retail trade turnover, cumulative percent change from the same period one year ago
Retail trade turnover growth decelerated to 9.6% in Jan 2018, compared with Jan It was 16.1% in Dec 2017;
Retail trade turnover rose 8.8% in 2017, compared with 2016;
Retail trade growth was 4.0% in 2016.
Households real income, percent change from quarter one year ago
Real incomes of households grew 0.2% in the 3Q’2017, compared with the 3Q’2016;
Real incomes of households grew 0.8% in 2016, after 22.3% drop in 2015;
Real wages increased 18.9% in December 2017, compared with December 2016;
Real wages growth accelerated to 19.1% in 2017, compared with 9.0% in 2016.

7. 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 7.0 times more than demand in December, compared with 4.6 in November. The ratio seasonally grew due to increase of unemployed persons (from 309 to 354 th people) and decline of open vacancies (from 68 to 50 th people).
The indicator peaked in December 2015 – 18.9 (the highest value in decade).

8. Inflation, yoy % change Inflation targeting
CPI rose 1.5% in January. Food prices rose 2.1%;
Annual CPI growth accelerated to 14.1% as of Jan 2018, compared with 13.7% as of Dec 2017;
CPI target for 2018 is 6±2%;
NBU forecast for yoy CPI change in 2018 is 8.9%;
PPI increased 4.4% in January. Prices in Electricity, gas, steam and air-conditioning supply increased 10.2%. Prices in Mining industries and Manufacturing grew 2.7% and 2.3% respectively;
Annual PPI growth accelerated to 22.0% as of Jan 2018, compared with 16.5% as of Dec 2017.

9. Current account and it’s components
Current account (CA) balance, 12-m sliding curve, USD bn
CA deficit was USD 690 m in December 2017, compared with USD 417 m in December 2016;
CA deficit was USD 3.8 bn (3.5% of GDP) in 2017;
CA deficit widened to USD 3.5 bn (3.7% of GDP) in 2016, compared with USD 0.2 bn (0.2% of GDP) in 2015.
Trade in goods, 12-m sliding curve, USD bn
Export of goods was USD 39.9 bn in It increased 18.8%, compared with 2016;
Import of goods was USD 49.0 bn in It increased 21.1%, compared with 2016;
The largest trade partner of Ukraine in 2017 was EU. EU share in external goods turnover was 36.5%. Share of Russia was 11.9%.

10. Terms of trade index (prices)
In December index value declined from to Index value reflects “neutral” terms of trade. It was formed due to simultaneous growth (compared with the same month of the preceding year) of export (index value 114.4) and import (index value 115.1) prices.
Terms of trade index (physical volumes) In December index value declined from 93.9 to Index value below 100 reflects “negative” terms of trade. It was formed due to decline (compared with the same month of the preceding year) of physical export volumes (index value 94.4) and growth of physical import volumes (index value 102.3).

11. Foreign direct investments
Net FDI , USD m
Net FDI in December 2017 increased USD 233 m, of which USD 193 m – to real sector;
Net FDI in 2017 increased USD 2.3 bn, of which USD 1.7 bn – to real sector;
Net FDI in 2016 were USD 3.3 bn, of which 63% (or USD 2.1 bn) to banking sector. Most FDI to 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).

12. Reserves and external debt
Gross International Reserves, months of import coverage
Gross international reserves (GIR) of NBU declined to USD 18.4 bn (3.5 months of import coverage) as of 1 Feb 2018, compared with USD 18.8 bn as of 1 Jan 2018;
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 January declined to USD 6.0 bn, from USD 6.7 bn month ago;
GIR were under pressure due to state debt repayment (USD 566 m). NBU interventions on currency market (net sell USD 16 m) had no significant impact on GIR. Reassessment of GIR due to USD weakening on international markets supported GIR on USD 206 m.
External Debt, eop USD bn
In the 3Q’2017 external debt grew USD 2.4 bn, to USD 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 bn as of 1 Jan 2014).

13. Budget
Balance of consolidated budget, UAH bn
Balance of consolidated budget, % of GDP
Deficit of consolidated budget in December 2017 was UAH 76.0 bn;
Deficit of consolidated budget in 2017 was UAH 42 bn, compared with surplus UAH 34 bn in Jan-Nov’2017;
Deficit of consolidated budget in 2017 was 1.4% of GDP (preliminary assessment based on NBU estimate of GDP in 2017 – UAH bn);
In 2016 deficit of consolidated budget was UAH 55 bn, or to 2.3%.

14. Public and publicly guaranteed debt
Nominal values, bn
% of GDP
In December 2017 public and publicly guaranteed debt grew UAH 80 bn, to UAH bn. In dollar terms, debt was broadly stable at USD 76.3 bn. Public and publicly guaranteed debt has risen UAH 212 bn (USD 5.3 bn in dollar terms) in 2017.
Debt-to-GDP level declined to 73.1% (preliminary assessment based on NBU estimate of GDP in 2017 UAH bn), from 81.0% in 2016.

15. Monetary policy: rate of exchange and interest rates
USD/UAH official exchange rate
In Feb 2018 (from 1 to 26 of Feb) average USD/UAH was 27.18, compared with January 2017 average Hryvnia appreciated 4.6%;
UAH depreciation to USD from Feb 2017 to Feb 2018 (average monthly rates as of Feb 26) was marginal 0.5% (hryvnia was broadly stable);
Average USD/UAH in 2017 was 26.60, compared with 2016-average UAH depreciation to USD was 3.9%.
NBU discount rate
On Jan 25 NBU raised discount rate from 14.5% to 16.0% due to high inflation. Current inflation level (14.1%) exceeds inflation target (6%) for 2018 significantly;
Interest rate on overnight liquidity providing transactions raised from 16.5% to 18.0% (discount rate + 2%);
Interest rate on overnight certificates of deposit raised from 12.5% to 14.0% (discount rate – 2%);
Next NBU meeting on interest rates will be on Mar 1.

16. Monetary policy: money supply
Cash (M0), percent change from month one year ago
Monetary base, percent change from month one year ago
In spite of contraction in January, annual growth of monetary aggregates accelerated.
Changes of monetary aggregates in January:
Monetary base declined UAH 6.7 bn, or 1.7%, to UAH bn;
M0 declined UAH 11.0 bn, or 3.3%, to UAH bn.
Annual (February 2017 – January 2018) changes of monetary aggregates:
Monetary base increased UAH 30.3 bn, or 8.4%;
M0 increased 26.8 bn, or 9.1%.

17. Insolvent Banks (as of 26 Feb 2018)
Number of banks classified insolvent (or leaving the market by decisions of their owners)
No one bank has left the market since the start of 2018;
More than hundred banks have been recognized insolvent by the NBU Resolutions or decided to leave the market since , of which:
1 bank (Privatbank) has been sold to government;
1 bank (Astra) has been sold to private investors;
1 bank (Express Bank) was joined to another bank (Industrialbank);
Owners of 4 banks (Finansovyi Partner, Apeks, PFB and Credit Optima Bank) decided to reorganize them into non-banking financial structures;
2 banks (Unison and Finansova Iniciatyva) are managed by provisional administrations;
92 banks are under liquidation procedures.
82 banks continue to operate in normal mode. 5 of them are state owned banks, 23 – belong to foreign banking groups, 54 are banks with private capital.
Market share of government controlled banks was 55% (as of 1 Jan 2018), share of subsidiaries of foreign banking groups was 31%. Market share of other banks declined to 14%.

18. Households deposits, bn
In January hryvnia deposits declined 0.8%, to UAH bn. Annual (Feb 2017 – Jan 2018) growth was 19.4%;
In January FX deposits increased 0.9%, to USD 8.5 bn. Annual (Feb 2017 – Jan 2018 ) growth was 1.1%.
Corporate deposits, bn
In January hryvnia deposits declined 4.9%, to UAH bn. Annual (Feb 2017 – Jan 2018) growth of deposit portfolio was 10.2%;
In January FX deposits declined 5.4%, to USD 5.0 bn. Annual (Feb 2017 – Jan 2018) growth of deposit portfolio was 7.4%.

19. Credits Households credits, bn Corporate credits, bn
FX credit portfolio in January rose 11.0%*, to USD 2.7 bn. Annual (Feb 2017 – Jan 2018) decline was 14.8%;
Volume of FX credits declined 90%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level);
UAH credit portfolio in January increased 3.9%, to UAH bn. Annual (Feb 2017 – Jan 2018) growth of UAH credit portfolio was 41.3%.
* Growth of FX credit portfolio in January was caused by changes in accounting standards
Corporate credits, bn
In January FX credit portfolio rose 3.8%, to USD 14.0 bn. Annual (Feb 2017 – Jan 2018) decline was 4.4%;
In January UAH credit portfolio declined 0.3%, to UAH bn. Annual (Feb 2017 – Jan 2018) increase of credit portfolio was 9.2%.