In 2017-2019, headline inflation is projected to be inching closer to its targets, although taking longer time than was initially anticipated. Read more in the Inflation Report of October 2017.
Inflation is projected to decelerate to 12.2% by the end of 2017 (9.1% according to the previous forecast). In Q3 2018, it will approach the mean of the target range, hovering at 7.3% by the end of the year (6.0% according to the previous forecast). The outlook for 2019 remained at the level of 5.0%.
The revised forecast for 2017-2018 came as a result of accelerating inflation in recent months and the emergence of new inflation factors, such as a stronger pickup in consumer demand, a rapid growth in pension payments in Q4 2017, the minimum wage increase and excise taxes on tobacco products slated for early 2018.
Inflation will be trending down due to a gradual exhaustion of the impact exerted by this year's sharp rise in food prices and moderate volatility of the hryvnia exchange rate over the forecast horizon. Both raw food price growth and core inflation, which significantly depends on the former, will slow down. Overall, fundamental inflation pressure will be moderate on the forecast horizon.
Also, a tighter monetary policy will help curb inflation. The recent decision of the NBU Board to raise its key policy rate to 13.5% per annum sought to prevent a significant deviation of inflation from its target level over the forecast horizon in the light of the factors elaborated above. Moreover, the decision was premised on possible forecast risks – persistent impact of supply factors that had driven up raw food prices this year and further pick-up in consumption amid rising social standards, as well as a prolonged delay in getting official financing under the EFF with the IMF.
Ukrainian economic growth in 2017 will be stronger than expected.
The NBU has revised its 2017 economic forecast upward (from 1.6% to 2.2%). This was the result of a more favorable than expected effect of both internal and external factors on the economic performance of most industries in Q2 and Q3 of the current year.
GDP growth is expected to speed up to 3.2% and 3.5% in 2018 and 2019 respectively. Private consumption will continue to be the main driver of economic growth in these years, thanks to higher wages and pensions, better consumer sentiment, and a pick-up in consumer lending. Private consumption is projected to grow 6% in the current year, slowing down to 4% in the future.
The current account deficit will be sustained at USD 4 billion in 2017-2019. Favorable trade conditions, the improved performance of agricultural companies, and economic growth in Ukraine’s main trading partners are expected to push exports further up. Particularly, as prices for ferrous metals have surged in 2017, they are projected to remain high in 2018–2019. Global grain prices will recover gradually as production contracts and consumption remains steady.
However, imports will rise further, driven by domestic consumer and investment demand, and the need to import energy resources.
There are also projections of larger dividend repatriations in 2017 (up by USD 0.9 billion yoy) after companies with foreign capital have reported more robust financial results and the easing of administrative restrictions on dividend payments to foreign investors. Payments of accrued dividend are projected to continue growing in 2018-2019.
The current account deficit will be fully offset by inflows to the financial account, which will enable further growth in international reserves. In 2017, a decline in FX cash outside banks will be the main source of capital inflows.
However, the NBU expects that foreign direct investment in the real sector will rise as the investment climate improves. Foreign direct investment is forecast to reach USD 2.1 billion in 2017, of which USD 1.1 billion will be channeled to the real sector. In 2018-2019, their amount is projected to increase to USD 3 billion. In addition, the inflow of debt capital to the private sector is expected to recover gradually.
After the government’s return to the external capital markers in 2017, the NBU expects that the government will continue issuing external government bonds in 2018 and 2019 (for the amount of USD 1.5 billion each year). This will help refinance a portion of external public debt, most of which falls due in 2019.
Continuing cooperation with the IMF will enable further accumulation of international reserves. The NBU expects that the IMF will recommence disbursements under the EFF in Q1 2018. Generally, the NBU projects the allocation of USD 3.5 billion in financing from the IMF next year, which will facilitate the disbursement of USD 0.5 billion pledged by the World Bank.
Along with the overall balance of payments surplus, this is expected to drive international reserves up to USD 22.2 billion, sufficient to cover imports for a period of 4.2 months, by the end of 2018. In 2019, though, international reserves will decrease to USD 21.1 billion (or 3.9 months of future imports) due to sizable public debt repayments.
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.