The National Bank of Ukraine revises its previous macroeconomic forecast considering the effects of the ban on trade with the certain areas of Donets and Luhansk oblasts
On Monday, 20 March 2017, the NBU’s Monetary Policy Committee held an ad-hoc meeting to approve updated NBU’s forecasts for 2017-2018 taking into account the effects of the ban on trade with uncontrolled areas of Donetsk and Luhansk oblasts. The same day, the NBU sent the updated forecasts to the IMF as a part of the review process of the macroeconomic forecasts under the IMF’s program with Ukraine.
The NBU expects that the greatest effect from the trade ban for Ukraine’s economy will be felt this year. Seizure of Ukrainian enterprises by terrorists and disruption of production and distribution chains will reduce metallurgy and mining output, production of coke and electricity. Due to the trade ban, 2017 economic growth rates will be 1.3 pp lower than projected in the January forecast.
This negative effect will be largely offset by other factors, primarily by more favorable prices for Ukrainian exports (metals, metal ore, and grains) than the ones forecasted earlier. Net positive effect of favorable external conditions on the economic growth is estimated at the level of 0.4 pp.
Therefore, considering the effects of the trade blockade and favorable external situation, the NBU has revised its previous 2017 growth forecast from 2.8% to 1.9%.
At the same time, the NBU expects that enterprises located in the uncontrolled areas will be able to deploy alternative sources of raw materials and energy and will reach maximum capacity utilization next year. Together with a comparison base effect, this will lead to faster growth in 2018 than it was assumed in January forecast. According to new estimates, real GDP will grow by 3.2% in 2018 (by 3.0% under the January forecast).
The trade ban will have no considerable impact on the headline inflation in 2017-2018. Therefore, the NBU expects no major changes in inflation forecast, projecting it at 9.1% in 2017 and 6.0% in 2018. Higher prices on foods in the global commodity markets will be offset by slower growth of administered tariffs and reduced pressure of aggregate demand on prices.
The ban will have a limited impact on the hryvnia exchange rate. A deteriorated balance of payments will mainly influence net foreign currency purchases to replenish international reserves.
In particular, the NBU projects that developments in eastern Ukraine will decrease metallurgical exports, while pushing coal import up. This may widen the current account deficit by USD 1.8 billion. This deficit is projected to be offset by favorable external commodity market conditions, which are expected to shrink the current account deficit by USD 1 billion. Consequently, 2017 projections for a current account deficit have been revised upwards to USD 4.3 billion (versus USD 3.4 billion in the January forecast). The 2018 current account deficit is expected to be at the level of 2017.
The NBU will reduce the impact of the growing current account deficit on the foreign currency supply in the interbank FX market. Recently, the NBU has been buying foreign currency in the interbank FX market, whenever there was a surplus of it, to replenish international reserves. In order to lessen the trade ban impact on the FX market, the NBU intends to cut its interbank foreign currency purchases. This will increase the availability of foreign currency on the market and help smooth out hryvnia exchange rate fluctuations. Accordingly, the NBU intends to revise international reserve projections downwards to USD 20.8 billion in late 2017 (versus USD 21.3 billion in the January forecast), and to USD 25.9 billion in late 2018 (versus USD 27.1 billion in the January forecast).
The Monetary Policy Committee is an advisory body which has been established to facilitate the exchange of information and opinions regarding implementation of monetary policy contributing to price stability.
Revised macroeconomic forecasts and monetary policy decisions will be finalized at the next NBU Board meeting on monetary policy, which is to take place on 13 April 2017, as scheduled. A detailed macroeconomic forecast will be included in the next issue of the quarterly Inflation Report on 20 April 2017.