Experts: Ukraine’s prospects for long-term development remain pessimistic

28 july 2015

Having analyzed current trends for the socio-economic development of Ukraine in 2014 and the first quarter of 2015, experts of the Analytical Center have concluded that the crisis has moved into a stagnant phase with no visible factors of growth, and its duration is more important than the trends of the indicators of socio-economic and political processes.

The economic crisis of 2008-2009 in the Ukrainian economy has not been overcome, experts say. The report focuses mainly on 2012-2015 when the most severe socio-economic crisis developed, which experts believe will have a major impact both on Russia-Ukraine relations, and the development of the entire region of Eastern Europe.

Since Q2 2014, there has been a domino effect in the exacerbation of the country’s economic crisis – scaling back of production and employment, and a reduction in incomes and demand. The continued tension on the line separating the two opposing sides, the worsening of the psychological war, and the increase in the economic conflict with Russia (its largest trading and economic partner) have led to more companies halting activity and residents having to “survive” or emigrate. The overall scale of the crisis has reached a level that is dangerous for the long-term development of the country, especially due to the decline in savings, say experts.

Evaluations made by international organizations of this year’s declining trend in Ukraine deteriorated sharply after a tranche was issued by the IMF in March 2015 (against all logic). The EBRD estimates the decline in Ukraine’s economy at -7.5% (in January 2015 the forecast was -5%). The World Bank also reduced its forecast to -7.5% (in January it was -2.3%). Back in April, the IMF predicted that the decrease in Ukraine’s economy would be -5.5%, but at the end of May, after an in-depth review of the situation, it reduced the forecast to -9%. The National Bank of Ukraine reported that in 2015 the reduction in the real GDP is expected to be 7.5%, but from Q2 2015 it will gradually begin to recover. The IMF’s forecast for a 2% increase in GDP in 2016 is for the moment based more on the assumption that a balance will be reached at the low point, rather than a return to growth, say analysts.

Key points of the report:

The economic crisis of 2008-2009 in the Ukrainian economy has not been overcome. The decline resumed in 2012 and by autumn 2013 contributed to the development of the socio-political crisis.

The overall scale of the crisis over the year of internal conflict has reached a level that is dangerous for the long-term development of the country, especially in connection with the decline in savings.

The devaluation of hryvnia was not able to prevent the worsening of the foreign trade situation due to losses on the Russian markets.

Inflation and unemployment are placing pressure on families, which has meant that private consumption has decreased sharply, although it is being maintained by means of migrant workers.

The financial results of companies in 2014 in all (consolidated) regions of the country caused a huge deficit.

The reduction in industrial production since spring 2015 is now slowing down – the crisis has essentially entered into a stagnant phase with no visible growth factors.

The budget is not working on development – expenditure under the IMF program is being reduced and military expenditure, which is difficult to evaluate numerically, is increasing.

Donbass accounts for a huge portion of the reduction in production, and the entire band of developed cities in the south east of the country is becoming deindustrialized.

At the start of the year, the budget came to a positive current balance due to the increase in taxation and the reduction in expenditure. Grants will not be able to resolve the budget problems.

The probability of a default as early as in July 2015 remains high. Regular escalation of the conflict may serve as a means of placing political pressure on credit providers to write off debts.

In Q3 2015 gas reserves should be pumped into Ukrainian storage facilities to provide gas for the EU in winter at relatively low prices due to oil indexation.

The recovery of growth in 2016 detailed in the IMF program (2% of GDP), if it happens at all, will be at such a low level that it will do little to change the situation for families and businesses.