The European Bank for Reconstruction and Development (EBRD) Transition Report 2006, issued on November 14, paints a positive picture of Ukraine's macroeconomic situation, with increased spending spurring growth.
The report states that despite significant energy resource shortages, Ukraine has benefited from "a boom in private consumption and an upturn in fixed capital investment". The report also notes that progressive legislative and regulatory reforms have "underpinned a favourable market response".
The bank believes GDP will grow by 6% in 2006, which represents a significant upgrade compared to its initial prediction of 1.2% at the beginning of the year, as a result of greater certainty on gas pricing. The Ukraine State Statistics Committee has indicated that real GDP growth for the year currently stands at 6.5%.
The strong growth has spearheaded an increase in public spending while maintaining fiscal stability. The budget deficit ran at 1.8% in 2005 and the government expects to meet the 2006 target of 2.5%. Fiscal revenues, while still mainly derived from income tax and value added tax, are being supplemented with earnings from growing retail trade, increased household incomes and better performance of financial enterprises. The current account deficit is expected to be 2% for 2006, a level sustained by managing the foreign debt. The IMF has stated that it expects the deficit to grow in 2007 but that increased capital inflow into the country would mitigate the trend.
Exports have grown in 2006 due to increased external demand, while imports have also risen, driven by domestic investments and consumption. In 2007, steel production is expected to increase while a dip in metal market prices is anticipated, which will hit both the industry and GDP.
According to the National Bank of Ukraine foreign debt increased by 7% in the first half of 2006 to $42bn.
Foreign direct investment into Ukraine has continued to grow in 2006, although not comparable to levels seen in 2005 with the privatisation of Kryvorizhstal to Mittal Steel. Nevertheless, the European Business Association predicts continued strong interest in 2007 with a forecast of $4bn to $5bn. A report from the State Statistics Committee published on November 15 shows the main areas of interest for foreign investors in the year to date to be the financial sector ($993.9m), real estate ($385.3m) and industry ($703.2m).
The performance of the economy remains vulnerable to swings in energy and metal prices, with the price of steel on international markets having a significant impact on the economic outlook. Observers have called for Ukraine to improve energy efficiency in order to become less reliant on imported natural gas. The country currently consumes three times as much energy per unit of GDP as Western European nations.
Meanwhile, inflation is down from the 2005 peak of 15%, but it remains high. Valeriy Lytvytskyi, head of the group of advisers to the National Bank of Ukraine, reported on November 7 that the fast pace of inflation currently is the main macroeconomic risk facing the country. He predicts inflation will stand at around 10% until the end of 2006 as a result of rising consumer good prices and increased domestic energy costs.
The consumer price index (CPI) also predicts accelerated price increases while the IMF forecasts point to 9.3% in 2006 and 13.5% in 2007. This has been driven to a large extent by a further adjustment of service charges and increasing food prices. Observers expect prices to continue rising throughout 2007 before slowing down in 2008, once the gas price stabilises and provided there will be no further administered tariff increases.
Fitch Ratings, the world-rating agency, has recently assigned a BB-rating to Ukraine, with an outlook upgraded from stable to positive. As a result, access to cheaper international capital should become easier in 2007, paving the way for another bullish year for the economy, provided that gas price rises can be absorbed both domestically and by the industry as a whole.