Main economic tendencies

Economic activity during June 2014 as in previous periods continued to be negatively affected by political unrest, especially in Eastern Ukraine and related uncertainties. Industrial production in Ukraine decreased the most noticeably. It was down by 5.0% yoy in June 2014, mainly as a result of 20.8% yoy drop in machine-building and a 21.7% yoy reduction in chemical industry, products of which had been exported to Russia. During January-June 2014 consumer inflation accelerated noticeably and amounted 12.0% yoy.

With total budget expenditures growth outpacing revenue, the period’s budget deficit stood at about UAH 12.2 billion, which was significantly larger than last year. Despite anticipated improvements in the state budget balance thanks to tough fiscal austerity measures, the overall public sector fiscal balance is forecast to widen, mainly on account of larger Naftogaz (national enterprise servicing fuel and energy complex) imbalances and high expenditures on anti-terrorist operation in Eastern Ukraine.
Meanwhile, banking sector has been weakened by political turmoil and uncertainties, local currency devaluation, deposit withdrawals, a high level of non-performing loans, reduction of foreign capital, and a lack of liquidity. At the same time, in the first month of summer Ukrainian stock market indices for the first time since February 2014 showed a weak trend, changing only by a few percent. The only measure according to which June 2014 for Ukrainian stock market was over May 2014 was the number of profitable investment funds. In June 2014 26 funds have made a profit.

The volume of agricultural production in Ukraine decreased for the first time since the beginning of the year. During January-June 2014 compared with the corresponding period in 2013 it declined by 3.9%. Compared to June 2013 agricultural production in June 2014 declined by 17.6%. However, compared to May 2014 it increased more than twice due to the seasonal factor.
Favorable weather conditions support a positive outlook for this year’s crop, despite funding constraints experienced by many farmers during the spring sowing campaign. Although the harvest is likely to be lower than last year’s record, thanks to agriculture the economy may perform better in the last quarter of the year.

Political uncertainty, armed confrontation in the eastern regions of Ukraine, hryvnya depreciation, and the announced tough fiscal austerity measures have started to weigh on household consumption and spending, rattled business confidence and undermined investments. In particular, retail sales turnover, often used to gauge private consumption, in June 2014 increased only by 0.8% yoy. At the same time, retail turnover of Ukrainian enterprises during this period declined by 2.1%.
Ukraine’s foreign financing concerns started to ease since the end of April 2014, following the IMF board approval of a USD 17 bln two-year loan agreement on th 30th of April and the first tranche disbursement in the amount of USD 3.2 bln in the first days of May.

As the IMF loan will also unlock financial assistance from other IFIs and individual countries, the sizable financial aid of about USD 27 bln in total for two years will help rebalance Ukraine’s external position.

In the first half of July 2014, the IMF’s mission to Ukraine left the country without issuing an official statement and without giving any indication regarding the fate on the remaining tranches of program. The mission was dispatched to Kiev on June 23 in order to assess the situation and the fulfillment of the conditions previously set by the IMF. Later it was announced that the mission would not leave Kiev on schedule in order to solve the “outstanding issues” with the government. Ukraine’s Prime Minister Arseniy Yatseniuk told the press that he expected a positive decision from the IMF. However, the mission silently left Kiev and it seems that the only positive news for Ukraine is that negotiations will continue. Currently, one of the conditions of the IMF program for Ukraine is to regain control of the rebellious eastern regions.

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BY CREDO LINE  INFORMATION & RATING AGENCY  KIEV, UKRAINE