KYIV, Sept 8 – Ukraine’s economy will probably grow 3.5% on the year in 2021, not 4.6% earlier expected, reflecting massive deceleration in the second quarter, Tomas Fiala, the head of the Dragon Capital investment bank, said Wednesday.

This is the second downward revision of the Ukrainian growth made by Dragon Capital over the past three months. Dragon originally expected the economy to grow 5.3% in 2021 but had lowered the forecast to 4.6% in July.

The revision comes on the back of a weak economic recovery registered in the second quarter after the State Statistics Service has reported the economy expanded 5.4% on the year, compared with 7-8% expected by analysts.

“This second quarter result surprised both local and global banks," Fiala told Interfax-Ukraine, adding that the wholesale trade was a major contributor to the weak data with Q2 wholesale trade declining 5.7%.

"This is a very unexpected figure, because all related sectors are growing, and retail trade is growing quite rapidly. The question arises as to how the State Statistics Service works and compiles these reports. On September 14, more detailed data on wholesale trade will be released, and on September 20, data on GDP. It is not yet clear why wholesale trade could have dropped so much," Fiala said.

The external environment for Ukraine is currently very favorable as prices for its exports have increased, the cost of money in the world remains low, and the likelihood of a long-term rise in inflation in the world and a sharp reversal of the policy of the leading central banks of the markets is still small, Fiala said.

"But, of course, the government and the country's leadership should bear in mind that this situation will not always be. Therefore, it is necessary, first of all, to keep the monetary and fiscal policy conservative and reduce the deficit [of the state budget] to 3% of GDP," Fiala said.

According to Dragon Capital estimates, the deficit of the state budget of Ukraine in 2021 will be about 3.9% of GDP instead of 5.2% laid down in the state budget. "It won't be possible to attract funding for a larger deficit, even with the current good market conditions," Fiala said.

He said the rollover on government bonds is about 97%. That is, the Ministry of Finance borrows less in the domestic market than it needs to pay off old debts, and attracts funds to finance the deficit through eurobonds, World Bank loans or EU macro-financial assistance, the second tranche of which is expected to be worth EUR 600 million in the middle of September.

Commenting on the growth of state budget receipts, the investment banker explained them with a high deflator – at about 20%, an increase in imports and a tax on profits, especially of commodity companies.

The monetary policy of the National Bank since the middle of last year, when its leadership was changed, remains competent, and the decision to terminate the long-term refinancing program involving government bonds from October 1 adds positive assessments to the NBU.

Speaking of risks, Fiala still named Russia as risk number one. "Unfortunately, it [this risk] does not disappear anywhere. Russia will always create problems for us, so this is the main problem," he said.

Fiala said the second risk is a possible deterioration in the commodity and financial markets, and the third is a rollback in the reforms.

Fiala recalled that since 2014, all business associations have been convincing the Ukrainian government of the need to create a new law enforcement agency instead of the tax police, the Economic Crime Department in the Ministry of Internal Affairs and the "K" Department in the SBU [fights corruption and organized crime]. It must work in a new way: without corruption, with qualified personnel with market salaries.

According to him, the business expected a complete separation from the previous experience, and the government appointed the former head of one of the agencies, who in the past put pressure on business, was the reason for the poor business climate and low investment, as director of the Bureau of Economic Security.

"Time will tell, but the first signal is alarming. We feel like giving up when business is involved in dialog, you express your wishes to the government, and it ignores them," Fiala said. (om/ez)