Macroeconomic forecast: Downturn to last two quarters, with Ukraine’s GDP down 2% over 2020

News 29 april 2020 - 15:34

This release contains macroeconomic forecast for 2020 under the base case (most probable) scenario developed by the Research Department of Alfa-Bank Ukraine.

Key points

  • Annual COVID-induced loss for the economy estimated at 5% of GDP; we have reviewed real GDP change forecast for 2020 from growth by 3.2% to decline of 2%
  • Depressed demand to support low inflation, despite fiscal deficit expansion
  • Due to a plunge in imports, Ukraine to improve its trade balance by USD 4 bln

Detailed

With regard to partial halt of the economy for quarantine and worse external demand, we have reviewed our real GDP change forecast for 2020 sharply: from growth by 3.2% to a decline of 2%. According to our estimates, the economy is expected to drop 7% y-o-y in the second quarter of 2020, when the hit will be the strongest. Decline is expected to drag into the third quarter of 2020. The economy is expected to recover from this shock only in 2021.

Our baseline scenario is based on the assumption that quarantine restrictions for businesses engaged in non-food retail, office activities and, partially, public transportation would be significantly softened in the second half of May, which would allow resuming most of suppressed business activities. At the same time, significant restrictions on international travel, offline leisure and some other services are likely to be continued. In case the coronavirus trend worsens and hence possible continuation of harsh and broad quarantine measures, the economy would follow a more pessimistic scenario.

Our baseline forecast also implies reaching agreement on a new loan arrangement with the International Monetary Fund in the second quarter of 2020. This, coupled with loans from other international financial institutions (IFIs), would allow funding most of the greatly increased fiscal deficit in 2020, with the latter reaching 8% of GDP. Strong fiscal deficit expansion would prompt public debt to GDP ratio to reach 61% of GDP, essentially returning to its 2018 level.

Ukraine’s GDP in 2016-2020, % real change y-o-y

Sources: State Statistics Service, forecast by Alfa-Bank Ukraine

We think that new circumstances have maintained the balance of inflationary risks in favor of low inflation over the course of 2020. In particular, lower prices for oil products and natural gas should compensate significant chunk of elevated prices for certain food items this spring. According to our baseline scenario, average annual growth of the Consumer Price Index (CPI) this year would end at 3.4% vs. 7.9% in 2019, just as we had expected at the start of this year. Only by year-end, inflation is expected to accelerate back into the target range pursued by the National Bank of Ukraine (4-6%).

Low inflation would support the National Bank of Ukraine in its further efforts to ease monetary policy. We deem the 7% prime rate heads-up announced by the NBU for mid-2020 as a realistic one and do not exclude even more loosening in monetary policy during the third quarter if depressed demand overwhelms inflation. The next two quarters, provided Ukraine secures external funding for the fiscal deficit, do offer an opportunity window for more accommodative monetary policy to support the economy.

Consumer Price Index (CPI) in 2017-2020, % annual change

Sources: State Statistics Service, forecast by Alfa-Bank Ukraine

Inflation low by Ukrainian standards would support real disposable income amid slowdown in wage growth and lower earnings of entrepreneurs. According to our estimates, real average wage growth in 2020 would come at 6.7%, not a significant worsening vs. 9.8% in 2019. However, layoffs and fewer incomes of small businesses should result in an abrupt stop for real disposable household income: from 6.5% growth in 2019 to zero change in 2020.

As another expected key macroeconomic development of 2020, we expect a much stronger decline in imports than in exports. In particular, this will be caused by a plunge in prices for imported energy, forced temporary cutback in imports due to quarantine, and sharp drop in tourist voyages abroad. These factors should prevail over negative consequences from lower steel prices and contraction in early grain crops in 2020. We expect Ukraine’s foreign trade balance to narrow by USD 4 bln to USD 8 bln in 2020. This, coupled with funding from IFIs, would support exchange rate stability and increasing international reserves of the NBU.

Key macroeconomic indicators


2017

2018

2019

2020f

GDP, UAH bln

2984

3561

3975

4090

GDP, USD bln

112,2

130,9

153,8

151,5

GDP, % real change

2,5

3,4

3,2

-2,0

CPI, % average annual change

14,4

10,9

7,9

3,4

CPI, % change Dec-to-Dec

13,7

9,8

4,1

5,9

Average wage, UAH ‘000

7,1

8,9

10,5

11,6

Average wage, % real change

19,1

12,5

9,8

6,7

Disposable income, % real change

10,9

10,9

6,5

0,0

Consolidated Budget balance, % of GDP

-1,4

-1,9

-2,1

-8,0

Public debt, % of GDP

71,8

60,9

50,3

61,3

Current account balance, % of GDP

-2,2

-3,3

-0,9

-1,0

USD/UAH, average annual

26,60

27,20

25,85

27,00

Sources: State Statistics Service, NBU, Ministry of Finance, forecast by Alfa-Bank Ukraine