Ukraine Economics - Gauging the Unknowns

After last year's quite spectacular economic performance, recent weeks have ushered in a quite significant deterioration in Ukraine. A decline in remittances from abroad, turmoil in global financial markets, quarantine measures and delays in the new IMF program will likely send the economy into recession this year. On the brighter side, the government has accumulated enough resources to service its external obligations and we don't expect the current crisis to be prolonged. We therefore think that growth will rebound strongly next year.> Ukrainian economy will likely contract this year. The quarantine measures, decline in remittances and weak external demand will likely push Ukraine into recession this year. While it is currently almost impossible to estimate the negative effect from the coronavirus, we think that GDP could shrink by anywhere between 0.5% and 3.0% this year. However, because the quarantine measures are only temporary, the economy should strongly rebound next year, with GDP growth reaching 6-8%. In both scenarios nominal GDP would remain above $140 bln, meaning that the GDP warrants would appreciate.> Hryvnia likely to remain under pressure, could reach USD/UAH 29.5. The decline in remittances from the EU, weaker exports and likely capital outflows have pushed hryvnia down 19% against the dollar YTD to trade above USD/UAH 28 as of March 26. This has come despite efforts by the NBU - it has sold around $1.5 bln in FX - to contain the depreciation. However, the currency still remains relatively strong given the current turmoil, so we think there is further downside close to 29.5 against the dollar. > Ukraine should have no problem repaying external debt. The government will need to repay around $4.1 bln over 2Q-4Q20 (including $0.5 bln to the IMF). However, the government has enough reserves ($25 bln as of mid-March) to meet these payments, while a new IMF deal will likely be in place by 3Q20, when there will be a peak in payments.