The National Bank of Ukraine Keeps Its Inflation Forecast for 2017-2019 Unchanged within the Target Bands
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In the latter half of 2017, annual inflation will remain rather volatile, slowing down to single - digits (9.1% yoy) only by the end of the year. In 2018-2019, inflation is projected to return to the midpoint of the target range – 6.0% and 5.0%, respectively, according to the latest quarterly Inflation Report (July 2017). Inflation forecast for 2017 was left unchanged due to mutually offsetting effects of various factors. On one hand, raw food inflation will accelerate at a faster-than-expected pace (by 11.8% yoy), driven by supply-side factors. On the other hand, contribution of administrated prices is forecast to be lower than previously expected. This is primarily attributed to the downward revision in the assumptions for an increase in natural gas prices for households. In the meantime, administered prices are projected to remain the fastest growing inflation component on the forecast horizon. In addition, core inflation is forecast to decelerate at a faster-than-expected pace to 6.1% yoy in 2017. Underlying inflation pressures are expected to be restrained by below-potential aggregate demand, prudent fiscal and monetary policies, and low imported inflation. In addition, an improvement in inflation expectations, resulting inter alia from favorable FX market conditions, will also help contain domestic price pressures. This will offset acceleration in raw food inflation (to 11.8% yoy) due to supply-side shocks: robust exports of Ukrainian food products amid high global meat and dairy prices and lower fruit and vegetable crops due to unfavorable spring weather conditions. Economic growth is projected to slow down in 2017 and accelerate in 2018 and 2019. In 2017, real GDP growth forecast was revised down to 1.6% in 2017 due to worse economic performance in the first half of the year and a downward revision of grain harvest estimates. However, GDP growth is forecast to accelerate to 3.2% in 2018 and 4.0% in 2019. The growth will be underpinned by gradually easing fiscal and monetary policies that will stimulate consumer demand, an improvement in the economy’s investment attractiveness and rising exports on the back of better terms of trade and high crop yields. Private consumption is forecast to be the main driver of real GDP growth over the forecast horizon backed up by higher real wages and a rise in pension benefits planned for 2017 autumn, firming consumer confidence and a a recovery in bank lending. Investment demand will also be a significant contributor to real GDP growth. However, higher production costs and the statistical effect of a high comparison base will serve to slow investment growth. The current account deficit will remain close to 4% of GDP in 2017 – 2018 and decline to 3% of GDP in 2019. Exports are forecast to increase in 2017. Higher agricultural exports, particularly grain, oil and sugar exports, as well as exports of meat and dairy products, will be the main factor behind the recovery in exports. Machinery and iron ore exports are also expected to expand. This will offset a decline in metallurgical export volumes due to the suspension of trade and the seizure of enterprises in the non-government controlled areas (NGCA). Meanwhile, imports, primarily investment imports, are expected to increase significantly. Energy imports will also grow, driven both by higher prices and a forced rise in purchase volumes due to the disruption of production ties with NGCA. In 2018, metallurgical output is expected to return to previous levels due to a shift away from the raw materials produced in NGCA toward the alternative sources of raw materials. This move will enable Ukrainian metallurgical enterprises to recover lost output, which will stimulate export growth. The expected recovery of exports in 2017-2018 will be offset by a corresponding pick-up in investment and consumer imports. However, starting from 2019, the trade deficit is projected to gradually narrow due to faster export growth underpinned by large capital investments made in previous periods. In 2017, the current account deficit will be fully covered by financial account inflows . In 2017, a decline in FX cash outside banks is expected to be a major contributor to financial account net inflows . In addition, confiscated funds of former president officials, which will be primarily allocated to repay public debt, will also allow increasing international reserves. In 2018-2019, investment and debt capital inflows to the private sector are expected to recover amid better investment climate. Moreover, the government is expected to issue sovereign Eurobonds as access to external financial markets is forecast to improve. This will allow rolling over part of the sovereign debt, given that the peak of repayments falls due in 2019. The overall BoP surplus and further cooperation with the IMF will enable further accumulation of international reserves. The key underlying assumption of this forecast is further cooperation with the IMF. Financing under the EFF program will remain an important source of replenishing international reserves. Continued cooperation with the Fund facilitates access to financing from other international organizations, and serves as an indicator of progress in the country’s structural reforms and, hence, its investment attractiveness. Along with the surplus of consolidated balance of payments, the disbursement of planned tranches under the EFF program will increase the international reserves to USD 20 billion by the end of this year and to USD 27.1 billion by the end of 2018. In 2019, given high public debt redemptions, international reserves will decline to USD 25.7 billion. The Inflation Report reflects the opinion of the National Bank of Ukraine as to the current and future economic state of Ukraine with a focus on inflationary developments, which are the input for monetary policy decision-making. The National Bank of Ukraine publishes the Inflation Report on a quarterly basis, starting from April 2015. |
