The Global Currency Investor A Quarterly Analysis of 50 World ...

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Aug 09Feb 10Aug 10Feb 11Aug 11COUNTRY REPORT: UkraineOutlook: NegativeS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) B+ Stable B2 Stable7.75% 9.38% N/A N/AEconomy and Market OutlookEconomic activity in Ukraine, which relies heavily on the exports of metals, has continued to performwell. Some slowdown in both the agricultural and manufacturing sectors, however, was noted, whichadversely impacted growth figures for Q2 11 with a preliminary result of 3.8 % q/q expansion asopposed to 5.3 % in Q1 11. Despite a recent softening in growth patterns, good harvests areexpected to boost the economy going forward, bringing the 2011 growth rate to a respectable 4.2%.As for the balance of payments, a recent drop in agricultural exports has expectedly had an adverseeffect on terms of trade causing some widening of the current account deficit in July with acumulative shortfall of USD574mn in the period and the year-end estimate at 3.5% of GDP. Theexchange rate is expected to hover around UAH8 versus the dollar, given the size of FX reserves,which currently stands at USD38bn, albeit increased future volatility will be allowed reflecting thecentral bank‟s further attempts to pave the way towards a more flexible currency. The consumer priceindex, has recently fallen, with August results printing a negative 0.4% m/m bringing the headline CPIdown to 8.9% from 10.6% in July. This disinflationary effect stems mainly from softer food prices,coupled with a strong base effect given a near 50% hike in gas tariffs in August 2010. Theinflationarytrend is set to remain subdued in the near term, with some pick up expected in Q4 and year-endestimate anticipated to be around 9.5%. On the fiscal front, the preliminary 2012 budget draftassumes the deficit will narrow to 2%, which is slightly above the government‟s initial estimate of1.5%, but well within the level of 2.3% as prescribed by the International Monetary Fund. Incomparison, the forecast for the metric in the current period will remain ata negative 2.8%.13.012.512.011.511.010.510.09.59.08.58.0EUR/UAHJPY/UAH12.0011.0010.009.008.007.006.0018.016.014.012.010.08.06.04.02.00.0CPI y/y %Politics2010 2011 (f) 2012 (f) President: Viktor YanukovychDespite progress being made with respectReal Growth (%) 4.2 4.7 4.8to the implementation of the pensionCPI (%)* 8.8 7.5 7.1 reform, 1.8 which remains the last keyCurrent account (% GDP) -2.1 -2.8 -3.5 requirement behind the IMF financing nextFiscal balance (% GDP) -5.7 -2.8 -2.0to the issue regarding the gas tariffs, thedisbursement of the delayed USD3bnGovernment Debt (% GDP) 40.1 39.3 39.4 tranches of the stand-by arrangementDaily volumesUSDwithout the fulfilment of the latter, isSpot FXN/aunlikely. The risk associated with financingthe current account deficit, however,remains limited, as the IMF loan wasFX Reserves36.37bn intended solely for the replenishment of the*End of YearSource: IMF, S&P, Bloomberg, Barclays buffer funds.45Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.