Executive Summary:

  1. The intense military actions experienced in Eastern Ukraine during August calmed down starting on September 1st, in accordance with the agreement reached in Minsk.  However, Ukrainian and international observers have reported an increase in the volume of Russian arms and weapons held by separatists in Donetsk, Luhansk and Crimea.
  2. Ukraine was on the agenda for the latest G-20 meetings in China. US and EU leaders re-confirmed their support for Ukraine’s territorial integrity. Moreover, prior to the meetings, these leaders re-confirmed their intention to continue sanctions against Russia until it fully implements the requirements of the Minsk-2 agreement.
  3. Ukraine continues to move its socio-economic reform agenda forward, with an emphasis on macroeconomic stabilization and fighting corruption. A key part of this effort is the new system of electronic income declaration for key government employees, which was put in place on September 1st.  However, it is not yet operational presumably due to interferences by some vested interests.
  4. July 2016 data recently released by the State Statistics Committee shows that Ukraine’s economic situation is relatively stable, with a small decline in industrial output of 0.2% yoy in July, based on new methodology.  Based on earlier methodology, industrial output increased by 0.9% yoy in July. On a month-over-month basis, industrial output in July increased by 7% mom, or by 4% mom after seasonal adjustment. In July, the industrial production index showed recovery in the following sub-sectors: chemicals, metallurgy, coke- and oil-refining, and electricity, gas and steam. Other sub-sectors, however, continued to experience declines.
  5. Other economic sectors also showed recovery in July. Ukraine’s construction output index increased by 12.9% yoy in July. Ukrainian retail trade turnover also increased by 4.5% yoy during the month. The agricultural production sector showed 1.2% yoy expansion in July 2016. Ukraine passenger transportation turnover increased by 9.1% yoy in July. However, freight transportation turnover fell to -8.4% yoy, compared to -1% yoy in June 2016. For the entire year 2016, we maintain our forecast for GDP growth at about 2%.
  6. The consolidated fiscal budget deficit increased to UAH 22.9 billion for January-July 2016. This is still satisfactory at about 1.5% of GDP. Typical for July, both state budget revenues and expenditures saw negative developments in dynamics due to the vacation period. Furthermore, tax revenues of the state budget saw a marginal decline.
  7. Despite continued monthly deflation, year-over-year consumer inflation reversed its trend, accelerating to 7.9% yoy in July. However, this change was expected and is in line with the inflation forecast of 12% by year-end.
  8. Hryvnia deposits in the banking sector continued to expand in July, while foreign currency deposits saw little change. Bank lending activities posted another sluggish performance in both Hryvnias and foreign currencies.  According to the results of the latest banking sector survey conducted by the NBU, banks expressed more optimism in relation to growth of both loans and deposits over the next 12 months, despite little progress in crediting.
  9. The UAH/USD exchange rate saw significant depreciation (around 6%) in the second half of August, which was related to the worsening situation on the border with occupied Crimea and escalation of warfare in Eastern Ukraine.
  10. In July 2016, the overall balance of payments showed a surplus of USD 110 million, increasing international reserves to USD 14.3 billion. This surplus was caused by a surplus in the financial account of USD 447 million, and despite a deficit in the current account of USD -354 million. For January-July, the deficit in the current account amounted to 1% of GDP.
  11. The level of international reserves of Ukraine is expected to increase further by the end of September, given the recent decision by the IMF to approve the disbursement of the USD 1.0 bln on September 14th. Ukraine will be able to secure an additional financial aid from the USA (USD 1.0 bln) and the EU (USD 600 mln)

    NOTE:  The complete August 2016 analytical report, including several interesting and important color charts and graphs, can be found in the PDF ATTACHMENT  to this post.

    LINK: Ukr-Monthly_Ec_Report_August 2016-Final.pdf