Macro: COVID-19 Update Ukraine: Rising COVID-19 cases and NBU scandal add challenges

The seven-day moving average of confirmed cases in Ukraine climbed to its highest point since the start of the outbreak due to the lifting of containment measures, which adds the uncertainty amid some calls to reimpose the restrictions.
In economic area, similarly to many CEE, April 2020 was regarded as the month of the steepest decline in business activity. We expect a steeper drop of the economic growth in Q2, which prompts us to revise our GDP forecast from -5.0% to -6.3% for this year. This, nonetheless looks less downbeat than the latest forecast of the IMF for Ukraine in which the Fund expects a 8.3% contraction for 2020.
COVID-19 imposed hefty costs on the state budget too. The Ukraine government, in agreement with the IMF and other international lenders, already increased its budget deficit to 7.5% of GDP for 2020. Meanwhile, some 83.4% of the means of the COVID-19 fund created for fighting the pandemic were distributed, while the state-owned companies paying dividends for 2019 added positive contribution to the budget.
The IMF approval of a USD 5 bn SBA loan for Ukraine helped to unlock more international funding for Ukraine including the EU and World Bank loans. However, on 1 July Ukraine National Bank Head Jakiv Smoliy resigned citing the ongoing political pressure and attempts to influence NBU independence. The resignation of the NBU Head significant affected Ukraines position with international investors, forcing the government to cancel the Eurobond after completing the deal.
That said, our central scenario assumes no abrupt changes in monetary policy after the appointment of a new Head of the NBU and the bank retaining full independence. As inflation remains well below the NBU target and based on previous policy statements, we expect the regulator to slash key rate to 4.5% by the end of this year.

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.