The results of the Business Outlook Survey (BOS) conducted by the National Bank of Ukraine in the first quarter of 2016 suggest that Ukrainian businesses’ inflation expectations have been drifting lower for the fourth quarter in a row.  The respondents expect consumer prices to rise by an average of 22.2% over the next 12 months.

The respondents assume that the exchange rate movements and the growth in production costs are behind the upward trend in consumer prices. Global price movements and budget expenditures on social welfare were perceived as having the weakest impact on price increases.

In spite of an improvement in inflationary expectations, depreciation expectations have become somewhat stronger in response to exchange rate fluctuations of the hryvnia seen in February 2016 and coincided in time with the   Business Outlook Survey, which was conducted between 8 February and 4 March 2016.    As a result of the coincidence in time of the survey and the exchange rate depreciation of the domestic currency, 9 out of 10 respondents expected  the domestic currency to weaken over the next 12 months.

Following last year’s gradual improvement, business expectations reversed their course at the beginning of the current year. In Q1 2016, the Business Outlook Index (BOI) stood at 98.4%, having decreased by 5.7 percentage points q-o-q.  The pessimistic sentiment prevailed across most industries. The most optimistic expectations were expressed by the respondents from agricultural and trade enterprises.

Both domestic and external factors that were in play in the first months of 2016 were behind the sharp deterioration in business expectations.  Political instability,  a temporary surge in exchange rate volatility observed in February and trade curbs imposed by the Russian Federation weighed on business expectations.

In spite of bleak business expectations, the respondents expect their borrowing needs to increase in the nearest future. Among those who intend to take loans to finance their business activities (35.6% of polled enterprises), the majority respondents plan on taking hryvnia loans (88.5% of the respondents).

For reference

799 enterprises from 22 regions of Ukraine (excluding temporarily occupied Crimea and Donetsk and Luhansk regions), representing the economy in terms of main economic activities, patterns of ownership, size and staff number, were polled in the survey. The survey only reflects the opinions of respondents (heads/managers of Ukrainian enterprises) who were polled, and does not represent NBU forecasts or estimates.