Last year the budget of Ukraine received more than 32 billion hryvnias of taxes from the enterprises on the territory of certain districts of Donetsk and Lugansk regions. In the uncontrolled territories remain a major metallurgical factories and mines. Part of production exported, adding to foreign exchange earnings of the country, the rest were transported to the territory controlled by Ukraine. Raw so-called “DNR” and “LNR” worked thermal generation (half of all CHP and thermal power plants) of the country and some smelters. Last week, the national security Council at the request of the President of Petro Poroshenko has banned the transport of uncontrolled territory. This decision was a response to illegal “nationalization” of Ukrainian enterprises on the territory of the so-called “republics” and the escalation of the situation in the East of the country.
The Cabinet of Ministers and the national Bank has revised macroeconomic indicators for this year: the blockade will affect the balance of payments, inflation, and GDP dynamics. As explained in the Ministry of Finance, in connection with the new macroeconomic indicators the IMF Board of Directors postponed the decision on granting Ukraine the next tranche. The decision was to take this week. Specific terms in the national Bank is not called, however, the Ukrainian side expects that the money allocated before the end of this month. The website “Today” figured out how the embargo will change the lives of Ukrainians.
Prices will rise, but only slightly
According to the forecast, the NBU: inflation for the year will reach 9.1%
According to the forecast of Ministry of Finance: inflation for the year to reach 9.6-16.6% of
Cabinet has placed the inflation rate at 8.1% in this year’s budget. The same forecast was given and the National Bank. It was the national Bank is responsible for inflation in the country – this year the Agency introduced a policy of inflation targeting (NBU adjusts the discount rate, thereby affecting the rate of inflation).
The blockade of Donbas, reduction of the GDP growth rate and Scorsese export revenues, the NBU expects the price increase at the end of 2017 at 9.1%, it said in an updated forecast, published on the Agency’s website. Given that the error in the original forecast was +/- two percentage points (PP) on the calculation of the NBU, the embargo on rising prices will be affected slightly.
At the same time, the Ministry of Finance voiced a more pessimistic forecast. They estimate that prices will increase from 1.5 to 8.5% of p. that is, the end of the year the cumulative inflation may reach from 9.6 to 16.6%.
According to the law “On indexation of money incomes of the population”, social standards should increase by at least the rate of inflation. This year the budget includes an increase in the minimum pension and the subsistence minimum of 10.1% (the indexation was calculated taking into account an inflation rate of 8.1%). The minimum salary in January 2017 has been doubled to increase it, according to Prime Minister Vladimir Groisman, in this year, more are planning to.
If inflation for the year will reach 16.6 per cent, and the level of indexation of the Cabinet will not revise, the Ukrainian pensioners will become poorer at least 6.5%.
The GDP growth rate to slow down
By the national Bank forecasts GDP will rise 1.9%
According to Finance Ministry forecasts GDP will grow by 1.5% and 0.8%
This year Ukraine’s GDP growth should reach 2.8 percent. Blockade of Donbass, as they say in the forecast, the NBU will reduce this figure to 1.9%. “The impact of the blockade on GDP minus 1.3 p. p. Partially this effect will be offset by improved terms of trade, a large crop, higher demand in trade partners,” – said in an interview with the EP Director for monetary policy and economic analysis of the NBU Sergey Nikolaichuk.
“The impact of the blockade on GDP minus 1.3 p. p. Partially this effect will be offset by improved terms of trade, a large crop, more demand and foreign trade partners”, – explain in NBU.
Finance Minister Oleksandr danylyuk during the investment conference of Dragon Capital, said the GDP growth rate caused by the blockade may be slowed down by 1.3 PP if the scenario is positive, and by 2 percentage points when negative. Positive scenario, noted in the NBU takes into account the transition of Ukrainian enterprises that previously used raw materials from the uncontrolled territories, to alternative energy.
Executive Director of the International Fund blazer Oleg Ustenko is sure to real growth dynamics of GDP in Ukraine should at least match the growth of the world economy. According to the IMF forecast, the world economy in 2017 will grow by 3.4%. In a positive scenario, Ukraine will fall behind the global economy this year by another 1.5%, and at negative 2.9%.
Export revenues will be reduced, and the pressure on the hryvnia will increase
According to the forecast of the Bank: the blockade on the course will not be affected
According to the forecast of the Cabinet: the dollar by the end of the year will reach of 30.2-32.8 hryvnia
The budget for this year laid a dollar on the level of 27.2 hryvnia. The National Bank assured that the blockade on the foreign exchange market will not be affected. The loss of export revenue should reach about $ 1.8 billion, but high prices in foreign markets compensate for the loss of at least a billion dollars.
“The negative effect of the embargo was largely offset by higher prices in foreign markets compared to those that we laid in January, our main export commodities — iron ore and metals. Favorable pricing environment offsets about one billion dollars of losses from the blockade to the balance of payments. The rest of this shock to the balance of payments will soften the national Bank due to the fact that it will reduce the volume of currency purchases to replenish the reserves,” – said in an interview with EP Serhiy Nikolaichuk.
“The negative effect of the embargo was largely offset by higher prices in foreign markets compared to those that we laid in January, our main export commodities — iron ore, metals,” explains Nikolaichuk.
At the same time in the Cabinet, according to RBC, predict the devaluation of the national currency for 3 to 5.6 UAH per dollar. “The impact of the blockade on the exchange rate of the hryvnia will be limited. The deterioration in the balance of payments in the first place will be displayed on the net currency purchases on the market to replenish the reserves,” – said in a statement NBU
In connection with the blockade of the assessment of the deficit in the current account balance for 2017 is degraded from 3.5 to 4.3 billion dollars, and the next from 3.4 to 4.3 milliage dollars. Also decreased the forecast of the volume of international reserves of Ukraine at the end of 2017, from 21.3 to 20.8 billion dollars, and at the end of 2018 – from 27.1 to 25.9 billion dollars.
Note, at the end of last year, the total export revenues of Ukraine amounted to 36.3 billion dollars, more than seven billion of this amount is export of metal products. At the meeting in the Cabinet of the President of the Association of Enterprises “Ukrmetallurgprom” Alexander Kalenkov has estimated the losses from the embargo at $ 3.5 billion. At the same time, the Ministry of Finance has estimated that losses could range from 1.2 to 2 billion dollars in export revenue
What would a blockade of Donbass: opinions of experts
“Completely changed the macroeconomic picture in Ukraine. At issue was economic growth, government budget deficit, ratio of public debt to GDP,” – says Oleg Ustenko. According to the expert, to the decision about the blockade of Donbas, Ukraine needed five billion dollars of external financing at the moment, this amount has increased significantly. “In order to obtain external financing in the first place to the cooperation with the IMF, without him to find this sum is to be possible, but extremely difficult,” – says the Executive Director of the International Fund blazer.
Oleg Ustenko believes the embargo, inflation in Ukraine will increase at least two percentage points. In addition, the national Bank will be “very difficult to keep the dollar within 30 hryvnia.”
At the same time, the Deputy Director of analytical Department of Alpari Natalia Milchakova sure that the blockade on the hryvnia exchange rate will not be affected. “Despite the fact that the blockade continues long enough, the dollar reacts to it is quite sluggish. Over the past two weeks, the hryvnia even appreciated against the dollar by 0.4%. We believe that the transport blockade significant impact on the exchange rate will not have, as the worsening situation in Eastern Ukraine, apparently priced in by the market”, – said Natalia Milchakova. The expert notes: the strengthening of the hryvnia in the blockade.
“We believe that the transport blockade significant impact on the exchange rate will not have, as the worsening situation in Eastern Ukraine, apparently priced in by the market”, – said Natalia Milchakova.
Expert on financial policy at the Institute of social and economic research, Antonina deshko adds: the last time the Ukrainian currency market shows “the wonders of sustainability”. The national currency fluctuates throughout the last month within 27,18 (the maximum value of the second of March) to 26.18 (minimum 13 March) hryvnias per dollar.
To expect that reductions in foreign exchange earnings due to the blockade uncontrolled territory will be fully compensated for by other sources, “too optimistic, the expert believes.
“But we have to take into account the fact that certain entities (primarily those in the occupied territory) will be reduced currency requirements. That is, there is a certain probability that the market itself will balance, and additional infusions (large-scale) from the National Bank is not required”, – Antonina adds deshko.
The President of the Ukrainian analytical center Alexander Okhrimenko, the blockade can cause reduction of GDP by 5%. This can completely offset the projected growth of the economy this year. “I think we can lose approximately 5% of GDP. In addition, if will fall, export revenues, the dollar will be much higher 27 hryvnia, so to speak. Don’t want to scare people,” – says economic expert.