1. Macroeconomic Review
July 2016

2. Summary GDP grew 0.1% in 1Q’2016 to 1Q’2015;
In 1H’2016 industrial production, transport, retail trade and construction supported growth. Decline in agriculture was marginal. Several negative trends renewed in June: industrial production contracted, transport and construction slowed significantly;
12-m CPI growth slowed to 6.9% in June (compared with 7.5% month ago and last year peak 60.9%). PPI slowed to 15.7% from 16.4% month ago (last year peak was 51.7%).
Unemployment rate in 1Q’2016 grew to 9.9%. Workforce supply/demand ratio grew to 9.5 in June, compared with 9.2 in May;
Annual (June 2015 – May 2016) deficit of current account (CA) was USD 0.1 bn, or 0.2% of GDP. CA deficit in Jan-May 2016 was USD 0.4 bn, or 1.4% of GDP;
Net FDI inflows were USD 1.8 bn in Jan-May Most of them were conversion of Ukrainian banks external debt into equity;
Gross international reserves were USD 14.0 bn (3.6 m of import coverage) as of 1 Jul;
External debt declined to USD 117 bn at the end of 1Q’2016, compared with peak USD 142 bn at the end of 2013;
Deficit of consolidated budget was UAH 3.8 bn in Jan-May 2016, compared with surplus UAH 19.4 bn in Jan-May Public and publicly guaranteed debt was UAH bn (USD 67 bn) as of 1 Jul;
Money supply (M0 and monetary base) in June increased significantly (2.0% and 4.5% respectively);
NBU cut discount rate from 18% to 16.5% in June. Next NBU meeting will be on July 28.

3. GDP
GDP, % change compared with the same quarter of the previous year GDP, % change compared with the previous quarter
GDP grew 0.1% in 1Q’2016, compared with 1Q’2015. Industrial production, construction, transport, retail trade were among growing industries. It was decline in agriculture;
GDP declined 0.7% in 1Q’2016, compared with 4Q’2015. Decline was after two straight growing quarters in 2H’2015;
IMF, World Bank and EBRD expect GDP growth in 2016 will be 1-2%;
GDP decline in 2015 was 9.9%. It was 6.6% in 2014.

4. Industrial production and transport
Industrial production, cumulative % change compared with the same period of the previous year
Industrial production growth in 1H’2016 to 1H’2015 was 2.0%;
Industrial production renewed contraction in June – it was 3.4%, compared with June Contraction is back after 4 consecutive months of slowing growth in Feb-May – from 7.6% in February to 0.2% in May;
In June marginal growth was kept in Electricity, gas, steam and conditioning air supply (0.1%, compared with June 2015). Mining industries and manufacturing contracted 8.9% and 1.6% respectively.
Freight turnover, cumulative % change compared with the same period of the previous year
Freight turnover growth in 1H’2016 to 1H’2015 slowed to 2.4%, compared with 4.2% in the 1Q’2016;
The fastest growth of freight turnover was in pipelines (+24.9%). It was supported by aircraft and motor vehicles % and 6.8% respectively. Freight turnover of railway trains and water transport continued to decline – 5.8% and 35.2% respectively.

5. Construction and agriculture
Construction, cumulative % change compared with the same period of the previous year
In 1H’2016 to 1H’2015 construction growth slowed to 9.1%, compared with 9.3% month ago;
Growth in June 2016 to June 2015 slowed to 4.7%;
Construction contraction in 2015 was 12.3%.
Agriculture, cumulative % change compared with the same period of the previous year
In 1H’2016 contraction in agriculture was 0.3%, compared with the same period of the previous year;
Agriculture contraction in 2015 was 4.8%.

6. Retail trade and households incomes
Retail trade turnover, cumulative % change compared with the same period of the previous year
Retail trade turnover growth quickened to 2.3% in 1H’2016, compared with the same period of the previous year. It was 1.8% in Jan-May;
Since March, growth levels, compared with the same periods of the previous year, are broadly stable around 2%;
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 declined 3.5% in Jan-Apr 2016, compared with Jan-Apr 2015;
Real wages grew 12.2% in May 2016, compared with May 2015;
Remarkable improvement of real wages dynamics in last months was due to moderating inflation.

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 1Q’2016:
Unemployment rate was 9.9%;
Civilian labor force was 17.8 m persons, of which unemployed persons – 1.8 m;
Participation rate was 61.7%;
Employment-population ratio was 55.6%.
Workforce supply was 9.5 times more than demand in June 2016, compared with 9.2 in May. Both workforce supply and demand fell in June (from 416 to 389 and from 45 to 41 th people respectively).
The indicator peaked in December 2015 – 18.9 (the highest value in decade).

8. Inflation CPI declined 0.2% in June, of which food prices – 0.8%;
Inflation, yoy % change
CPI declined 0.2% in June, of which food prices – 0.8%;
12-m CPI growth slowed to 6.9% as of June, compared with 7.5% as of May, and with peak 60.9% in April 2015;
PPI was unchanged in June. Prices in manufacturing grew 1.5%, while prices in mining industries and Electricity, gas, steam and air-conditioning supply fell 2.0% and 3.0% respectively;
12-m PPI slowed to 15.7%, compared with 16.4% as of May and peak 51.7% as of March 2015.

9. Current account and it’s components
Current account (CA) balance, 12-m sliding curve, USD bn
In May CA surplus was USD 403 m, compared with deficit USD 54 m in May 2015;
CA deficit in Jan-May 2016 was USD 424 m, or 1.4% of GDP. It broadly coincided with deficit USD 461 m (1.4% of GDP) in Jan-May 2015;
Annual (June 2015 – May 2016) CA deficit diminished to USD 139 m, or 0.2% of GDP. It was USD 596 m, or 0.7% of GDP, month ago.
Trade in goods, 12-m sliding curve, USD bn
In May 2016 to May 2015 export of goods declined 2.3% (to USD 2.6 bn). Agriculture goods export increased 11.1%, minerals – 8.4%. Other major export components continued to decline;
In May 2016 to May 2015 import of goods declined 8.5%, to USD 2.7 bn. Decline of import volumes was due to fall of energy import (-59.1%). Non-energy import grew 18.0%;
The largest trade partner of Ukraine in Jan-May 2016 was EU. EU share in external goods turnover was 36.5%. Share of Russia was 9.9% (almost 4 times less, than EU share).

10. Terms of trade index (prices)
In May index grew to from 97.6 month ago. It is the highest value of the index since April Index value above 100 reflects positive terms of trade. Sharp index value improvement was due to faster decline of import prices (index value 91.7), than export prices (94.7).
Terms of trade index (physical volumes) In May index value was (as well as in April). Index value above 100 means positive terms of trade. High index value was ensured by faster growth of physical export volumes (index value 104.2) then physical import volumes (index value 103.0).

11. Foreign direct investments
Net FDI , USD m
Net FDI in May 2016 declined sharply to USD 20 m. Most of investments were to real sector of economy;
Net FDI in Jan-May 2016 were USD 1.8 bn, compared with USD 0.9 bn in Jan-May 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).

12. Reserves and external debt
International Reserves, months of import coverage
Gross international reserves (GIR) of NBU rose to USD 14.0 bn as of 1 Jul 2016, compared with USD 13.5 bn as of 1 Jun 2016;
GIR increase was ensured mostly by NBU interventions – NBU net purchases of currency were USD 430 m in June;
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 rose to USD 3.2 bn as of 1 Jul 2016, compared with USD 2.7 bn as of 1 Jun 2016.
External Debt, eop USD bn
External debt declined to USD bn as of the end of the 1Q’2016, compared with USD bn at the end of the 4Q’2015;
External debt declined significantly, 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 declined from UAH 72 bn to UAH 31 bn in 2015, or from 4.5% to 1.6% of GDP;
In Jan-May 2016 deficit was UAH 3.8 bn, compared with surplus UAH 19.4 bn year ago;
Surplus in May was UAH 1.3 bn.

14. 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 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 1H’2016 public and publicly guaranteed debt grew from UAH bn to UAH bn. At the same time, debt grew from USD 65.5 bn to USD 67.1 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%).

15. Monetary policy: rate of exchange and interest rates
USD/UAH official exchange rate
USD/UAH average official exchange rate from 1 to 25 of July was (hryvnia appreciated 0.5%, compared with June average values);
UAH depreciation to USD, compared with average Dec-2015 rates, was 5.7%. Largest part of depreciation was in Jan-Feb 2016 (11.3% compared with Dec 2015). In Mar-Jul (as of Jul 25) hryvnia reversed course and appreciated 6.3%.
NBU discount rate
On Jun 23 NBU cut discount rate to 16.5% due to slowing CPI. Last change of discount rate (cut from 19% to 18%) was in May 2016;
NBU intends to continue gradual monetary policy easing if 1) program with IMF back on track, 2) inflation risks continue to fall;
Interest rate on overnight liquidity providing transactions cut from 20% to 18.5% (discount rate + 2%);
Interest rate on overnight certificates of deposit cut from 16% to 14.5% (discount rate – 2%);
Next NBU meeting on interest rates will be on Jul 28.

16. 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 June money supply growth quickened:
M0 increased UAH 5.7 bn, or 2.0%, to UAH bn (it is more than annual M0 increase);
Monetary base increased UAH 15.3 bn, or 4.5%, to UAH bn.
Annual (July 2015 – June 2016) growth of monetary base was UAH 22.3 bn, or 6.7%. At the same period, M0 increase was marginal - UAH 1.2 bn, or 0.4%.

17. Insolvent Banks (as of 25 Jul 2016)
Number of banks classified insolvent
81 banks have been recognized insolvent by the NBU Resolutions or decided to leave the market since , of which:
1 bank (Astra) has been sold to private investors;
6 banks are managed by provisional administrations;
72 banks are under liquidation procedures.
15 banks have been recognized insolvent or decided to leave the market since the start of the year;
No one bank has been recognized insolvent in July (as of 25 Jul 2016). It is the first time since November 2015.
102 banks continue to work in normal mode.

18. Households deposits, bn
In June hryvnia deposits increased 2.8%, to UAH bn. Growth since the start of the year was 2.6%;
FX deposits were broadly stable since the start of the year – decline in 1H’2016 was 0.5%, of which in June - 0.2%.
Corporate deposits, bn
In June hryvnia deposits increased 1.0%, to UAH bn. Deposit portfolio in 1H’2016 grew 3.5%;
In June FX deposits increased 5.2%, to USD 5.1 bn. Growth since the start of the year was 12.8%.

19. Credits Households credits, bn
FX credit portfolio in June declined 1.9%, to USD 3.5 bn. Decline since the start of the year was 10.2%, annual decline – 26.0%;
Volume of FX credits declined 87%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level);
UAH credit portfolio declined UAH 1.4 bn (or 1.9%), to UAH 75.0 bn in June. UAH credit portfolio decline since the start of the year was 3.3%, annual decline – 24.8%.
Corporate credits, bn
In June FX credit portfolio declined USD 0.5 bn (or 2.7%), to USD 18.1 bn. Decline since the start of the year was 4.6%, annual decline %;
In June UAH credit portfolio declined UAH 1.5 bn (or 0.4%), to UAH bn. Decline since the start of the year was 1.0%, annual decline %.