EXECUTIVE SUMMARY

1)   Military action in the temporarily occupied territories of Donetsk and Lugansk regions remains at high levels. International observers, including the OSCE, confirmed the use of illegal heavy artillery by Donbas rebels, with separatist leaders reconfirming their plans to control more territories of Lugansk and Donetsk.

2)   To avoid possible future military deterioration, the Normandy Four Group met in Paris at the end of June and concluded that there is no military solution for the existing conflict. This signals that the conflict may be “frozen”.

3)   Ukraine continues to move forward with its reform agenda. In particular, there was progress in ensuring the country’s financial stability, accelerating anticorruption efforts and implementing energy sector reform. Both Ukrainian authorities and IMF executives confirmed their willingness to continue co-operation within the framework of the Extended Fund Facility program (EFF).

4)   Revised statistics show that during the first quarter of 2015, GDP declined by 17.2% yoy, with deeper declines in private investments (-25.1% yoy), and private consumption (-20.7% yoy). On the supply side, major GDP declines took place in the east of the country and in the following sectors: construction, mining, manufacturing, and wholesale and retail trade.

5)   High-frequency monthly output data reveals some improvement in many sectors during May 2015, both on a month-to-month basis and year-to-year. This may signal that output may be stabilizing in many sectors, although at a low level.  These output improvements took place in mining and manufacturing, food processing, metallurgy, and petroleum refining.

6)   The consolidated fiscal budget continued to improve in January-May 2015, with the fiscal budget showing a surplus of UAH 19.4 billion, which was almost 5% higher than in January-April. This improvement was due to temporary factors such as Hryvnia devaluation and inflation, which helped increase government revenues while expenditures were controlled by austerity measures. For 2015, a fiscal deficit of 7.5% of GDP is still expected.

7)   The previous upward trend of consumer inflation was reversed in May 2015, with consumer prices increasing by 58.4% yoy in May, compared to 60.9% yoy during April.  In May, on a month-to-month basis, almost all price categories experienced a deceleration of inflation from 14.0% mom in April to 2.2% mom in May. Inflation by the end of 2015 is now expected to be 45%.

8)   After one month of improvement, banking deposits slightly deteriorated in May. National currency deposits posted just a minor increase of 0.1% mom, while foreign currency deposits denominated in dollars fell by 3% mom.  Similarly, banking loans also observed negative developments in May. National currency loans saw a 2.8% mom decline, while foreign currency loans declined by 1.5% mom.

9)  The Hryvnia exchange rate stabilized at around 21 UAH/USD during May, despite some increased volatility mid-month.  Through the rest of the year, the Hryvnia is expected to devalue to around 25 UAH/USD, provided that the IMF program is on track.

10) Ukraine’s balance of payments is relatively stable, with a small current account deficit of USD 10 million during May.  During January-May 2015, the current account deficit was also small at USD 345 million, but the deficit in the financial/capital account was bigger at USD 1,444 million. This latter deficit was caused by heavy repayments of external debt by local commercial banks and corporations (USD 3,162 million).  On the other hand, foreign direct investments compensated for part of this inflow with a net inflow of USD 774 million during January-May 2015.  IMF net financing of USD 4,260 million covered these deficits and enabled international reserves to reach USD 9,900 million at the end of May. The IMF has approved in principle the disbursement of the next tranche of USD 1.7 billion once some pre-conditions are met.

11)  The Ukrainian government is currently negotiating the restructuring of about USD 23 billion of Eurobonds with its foreign creditors.  But the negotiations are deadlocked on the governmentm proposal to secure a “haircut” of principal of 40%.  A more recent government proposal includes a provision to allow creditors to recover more value if future GDP performs better than anticipated. Formal negotiations are now expected to start on July 6th.

The complete June 2015 analytical report, including several interesting and important color charts and graphs, can be found at the this link.

ANALYTICAL REPORT: by Oleg Ustenko, Djulia Segura, Valentyn Povroznyuk, Edilberto L. Segura
SigmaBleyzer private equity investment management firm & The Bleyzer Foundation (TBF), Kyiv, Ukraine