Ukraine Country Report Oct21 - October, 2021

October 4, 2021

Ukraine’s real GDP increased 5.7% y/y in 2Q21, the State Statistics Service reported on September 20, improving on its preliminary estimate of 5.4% y/y. However, economic growth is slowing as the low base effects from last year’s coronacrisis fade away; the economy declined 0.7% q/q on a seasonally adjusted basis.

Growth was mostly driven by private consumption, which advanced 17.4% y/y in 2Q21 and gross fixed investment picked up 14.8% year-on-year in the same period as companies went back to work.

On the production side, economic advancement was mostly due to the growth in manufacturing (8.2% y/y), financial and insurance services (17.8% y/y) and transportation (9.6% y/y).

But despite the positive results the numbers underwhelmed analysts. Evgeniya Akhtyrko of of Concorde Capital said in a note: “Given the huge economic downfall in 2Q20 (-11.2% y/y), the GDP growth of 5.7% y/y in 2Q21 is not impressive, meaning that the country's output is still below the pre-pandemic level. The recovery in investment is not enough to cover the fall of the previous year. Exports look quite impressive in money terms, but a high respective deflator (58.9%) turned the real result to the red.”

The slow recovery of Ukraine’s economy after the pandemic crisis indicates its overall structural weakness and low resilience to shocks. The reforms are as badly needed as ever and a simple bounce back from a collapse is not enough to kick start long-term sustainable growth.

Still the high prices for metals and grains are a boon and have taken some of the pressure off the budget and the Cabinet of Ministers expect the budget deficit to fall from around 5.5% this year to 3.5% next year. Revenues this year are already ahead of the plan.

The bugbear remains uncomfortably high inflation, which is over 10% for the first time in years and now record high gas prices are also eating into resources.

On the political front Ukrainian president Volodymyr Zelenskiy has made little progress in persuading his international partners to commit to Ukraine’s access to either Nato or the EU.

At home his fight against the oligarchs is making progress with a new anti-Akhmetov law in the works that would close down another money-making scheme, but a lot more is to be done on this score.

The state has also launched a very ambitious $227bn 5-10 year development plan. The problem is this plan requires some $20bn of investment every year, whereas Ukraine’s all-time for FDI was $10.3bn in 2008 so at this point this plan looks unrealistic.

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