Macro: Update_COVID19_CEE_Ukraine_22_09_2020

COVID-19 development: Ukraine prolonged quarantine restrictions imposed on 12 March till 31 October due to the increasing number of new infections. The infection spread increases the likelihood of harder quarantine restrictions to be imposed in certain regions. However, we do not expect the harsh type of the lockdown, assuming that adaptive quarantine will be used instead, as the best compromise between the safety and the economic needs.

Economic development: The real sector was hit hard by pandemic with Q2 2020 GDP down 11.4% yoy (-1.3% in Q1). However, on a positive note, the decline in industrial output slowed further to 4.2% yoy in July compared to the 16.2% slump in April. In our opinion, although the decline of Q2 GDP was quite significant, the third quarter should see a somewhat better GDP growth. Overall, we expect a 6.3% GDP decline for the whole year due to a sharp loss of growth in Q2 to be compensated by a subsequent recovery in H2.

Fiscal policy: In the government finance area, the pressure on the budget comes from relatively sizeable debt repayments in 2020 aggravated by the extra spending pushing up the budget deficit to 7% of GDP. At the beginning of July, state budget received a significant support from the dividend payments by state-owned business entities. Thus, the MinFin accumulated a record high cash cushion of UAH 75.7 bn on Treasury accounts, which made it possible to ensure smooth funding of the budget operations. Also, an agreement has been reached with the EU on a new EUR 1.2 bn MFA 12m program but, the uncertainty about the disbursement of the second tranche of the IMF loan remains.

Monetary policy and UAH: On the monetary policy front, on 3 September NBU left key rate unchanged at 6% for the second time this year, signalling temporary pause to the easing. Inflation remains low at 2.5% yoy (August) but may shoot up to enter a 5% (+/-1pp) target range by the end of this year, so soft monetary stance should help restore consumer demand notwithstanding a risk of the second-wave pandemic. In this context we expect the NBU to keep key rate at current levels until the end of 2020. Despite non-residents have been selling local UAH bonds since March (about USD 1.5 bn), international reserves grew to USD 29 bn in September thanks to trade inflows stabilising UAH, which boosted import cover to 4.9 months. According to our forecast for this year the average USD/UAH rate will reach 27.5 for Q3 and 27.8 for Q4.

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.