ICPS has downgraded its economic forecast as export conditions took a sharp turn for the worse and access to external borrowing became more restricted, both as a result of the deepening global crisis. In the initial ICPS forecast, GDP was expected to grow, though at a slower pace, during the forecast period. Now ICPS analysts foresee much slower economic growth in 2008, a decline in 2009, stagnation with gradual recovery in 2010, and modest growth again in 2011.

Ukraine’s economy reacted quickly to deterioration in the world economy. Manufacturing output contracted, massive job cuts began, the hryvnia fell sharply, and Ukrainians lost confidence in the banking system. These are just a few of the symptoms of Ukraine’s economic crisis. The extreme vulnerability of Ukraine’s economy to the global crisis is due to its considerable openness and to dependence on external credits.

ICPS analysts have downgraded their GDP forecast by 3.1 pp to 2.6% in 2008 because of a lower forecast for exports and consumption. ICPS analysts expect manufacturing and construction to decline in 2008.

ICPS analysts also expect the NBU to intervene less on the currency market, given the extensive reduction in its reserves in October–November 2008 as it propped up the hryvnia. The ICPS forecast is for the exchange rate to fluctuate at UAH 7.0/USD by the end of the year.

ICPS economists also expect negative trends in the financial system and the world economy to deepen in 2009 and Ukraine’s GDP to fall 5.2%. Export-oriented manufacturing will contract, which will affect related markets. To minimize costs, exporters will cut payroll, send employees on unpaid leave, or downsize. Restricted lending and a weaker hryvnia will decrease imports in dollar terms.

Meanwhile, investment will contract 15% as domestic and external demand decline, profits fall, credit becomes scarce and equipment more expensive with a weaker hryvnia, and investment risks grow with the uncertain economic outlook. Public investment will be low as the Government focuses on social spending. As consumer incomes and credit decline, private consumption will contract 8%. Sales of cars and other big ticket items will suffer the most.

Meanwhile, the hryvnia will continue to weaken relative to the US dollar.

ICPS analysts say that GDP will grow 1% in 2010 and 3.5% in 2011. As external demand picks up very modestly, exports will grow in 2010–2011. Imports will also grow, but at a slower pace, given a weaker hryvnia, little credit and slow income growth. According to ICPS analysts, the current account deficit will turn into a surplus in 2010. A switch to a positive current account should bolster the hryvnia slightly.

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