Macroeconomic Review December 2016

Summary GDP growth accelerated to 2.0% in 3Q’2016 to 3Q’2015 (from 1.4% in the previous quarter); Growth in all major branches (industrial production, transport, agriculture, construction, retail trade) accelerated in November; 12-m CPI growth slowed to 12.1% in November, compared with 12.4% month ago. 12-m PPI accelerated to 32.0% from 29.2% month ago; Unemployment rate in 3Q’2016 fell to 8.8% from 9.0% in 2Q’2016. Workforce supply/demand ratio increased to 6.3 in November, compared with 5.5 in October; Real wages grew 6.2% in October 2016 to October 2015. Real incomes of households grew 5.6% in 2Q’2016, compared with 2Q’2015; Annual (November 2015 – October 2016) deficit of current account (CA) was USD 2.4 bn, or 2.8% of GDP. CA deficit in Jan-Oct 2016 was USD 2.5 bn, or 3.4% of GDP; Net FDI inflows were USD 3.1 bn in Jan-Oct 2016. Most of them were conversion of Ukrainian banks external debt into equity; Gross international reserves were USD 15.3 bn (3.6 m of import coverage) as of 1 Dec; External debt grew to USD 116 bn at the end of 3Q’2016, compared with USD 115 bn at the end of 2Q’2016. External debt declined significantly from peak USD 142 bn at the end of 2013; Deficit of consolidated budget was UAH 26.9 bn in Jan-Oct’2016, compared with surplus UAH 26.8 bn year ago. Public and publicly guaranteed debt was UAH 1 743 bn (USD 68 bn) as of 1 Nov; Money supply growth remains moderate: annual increase of M0 and monetary base in November was 6.1% and 11.3% respectively; NBU kept discount rate at 14.0% in December. Next NBU meeting will be on January 26.

GDP GDP, % change compared with the same quarter of the previous year GDP, % change compared with the previous quarter GDP grew 2.0% in 3Q’2016, compared with 3Q’2015. Growth accelerated from 1.4% in the previous quarter; GDP grew 0.5% in 3Q’2016, compared with 2Q’2016. Growth slowed slightly from 0.6% in the previous quarter; GDP decline in 2015 was 9.9%. It was 6.6% in 2014.

Industrial production and transport Industrial production, cumulative % change compared with the same period of the previous year Industrial production growth in Jan-Nov 2016 to Jan-Nov 2015 was 2.1%; Industrial production growth in November (compared with November 2015) accelerated to 3.7%, compared with 0.8% month ago; The most remarkable growth in Jan-Nov 2016 was in Manufacturing – 3.4%. Growth in Electricity, gas, steam and conditioning air supply was 1.8%. Mining industries contracted 0.4%. Freight turnover, cumulative % change compared with the same period of the previous year Freight turnover growth in Jan-Nov 2016 to Jan-Nov 2015 accelerated to 2.1% from 1.3% in Jan-Oct 2016; The fastest growth of freight turnover was in pipelines (+16.6%). It was supported by aircraft and motor vehicles - 9.6% and 9.5% respectively. Freight turnover of railway trains and water transport continued to decline – 4.4% and 26.1% respectively.

Construction and agriculture Construction, cumulative % change compared with the same period of the previous year In Jan-Nov 2016 to Jan-Nov 2015 construction growth was 14.1%; Growth in November 2016 to November 2015 was 11.6%; Construction contraction in 2015 was 12.3%. Agriculture, cumulative % change compared with the same period of the previous year In Jan-Nov 2016 agriculture growth, compared with the same period of the previous year, was 2.9%. It accelerated from 2.8% in Jan-Oct and 0.9% in Jan-Sep; Agriculture contraction in 2015 was 4.8%.

Retail trade and households incomes Retail trade turnover, cumulative % change compared with the same period of the previous year Retail trade turnover growth accelerated to 3.7% in Jan-Nov 2016, compared with the same period of the previous year. It was 3.0% in Jan-Oct 2016; Retail trade decline was 20.7% in 2015. Households real income, % change compared with the same quarter of the previous year Real incomes of households reversed from decline 14.9% in the 1Q’2016 (compared with the 1Q’2015), to 5.6% growth in the 2Q’2016; Real wages grew 9.1% in Jan-Sep’2016, compared with Jan-Sep’2015; Real wages grew 6.2% in October 2016, compared with October 2015.

Unemployment rate, % ILO methodology Workforce supply to demand ratio Labor market Unemployment rate, % ILO methodology Workforce supply to demand ratio Key labor market indicators as of 3Q’2016: Unemployment rate was 8.8%; Civilian labor force was 18.1 m persons, of which unemployed persons – 1.6 m; Participation rate was 62.7%; Employment-population ratio was 57.2%. Workforce supply was 6.3 times more than demand in November, compared with 5.5 in October. The ratio increased due to simultaneous growth of supply (from 316.2 to 337.9 th people) and decline of demand (from 57.1 to 53.3 th people). The indicator peaked in December 2015 – 18.9 (the highest value in decade).

Inflation CPI increased 1.8% in November. Food prices grew 1.0%; Inflation, yoy % change CPI increased 1.8% in November. Food prices grew 1.0%; 12-m CPI growth slowed to 12.1% as of November, compared with 12.4% as of October. 12-m CPI remains well below peak 60.9% in April 2015; PPI increased 2.2% in November. The most significant price growth was in Electricity, gas, steam and air-conditioning supply – 4.5%. Prices in mining industries and manufacturing grew 4.4% and 1.0% respectively; 12-m PPI accelerated to 32.0%, compared with 29.2% as of October.

Current account and it’s components Current account (CA) balance, 12-m sliding curve, USD bn In October CA deficit was USD 234 m, compared with USD 431 m in October 2015; CA deficit in Jan-Oct 2016 was USD 2.5 bn, or 3.4% of GDP, compared with USD 0.3 bn (0.4% of GDP) in Jan-Oct 2015; Annual (Nov 2015 – Oct 2016) CA deficit was USD 2.4 bn, or 2.8% of GDP. It was USD 2.6 m, or 3.0% of GDP, month ago. Trade in goods, 12-m sliding curve, USD bn In October 2016 to October 2015 export of goods declined 0.6% (to USD 3.0 bn); In October 2016 to October 2015 import of goods declined 0.6%, to USD 3.7 bn. Energy import declined 29.2%, non-energy import grew 12.1%; The largest trade partner of Ukraine in Jan-Oct 2016 was EU. EU share in external goods turnover was 35.0%. Share of Russia was 11.0%.

Terms of trade index (prices) In October index value declined from 103.0 to 102.7. Value above 100 reflects positive terms of trade. Relatively high index value was due to increase (compared with the same month of the previous year) of export prices (index value 101.2) and simultaneous decline of import prices (index value 98.5). Terms of trade index (physical volumes) In October index value improved from 84.0 to 97.1, but it still remains below 100. Index value below 100 means negative terms of trade. Negative index value was due to decline (compared with the same month of the previous year) of physical export volumes (index value 97.9) and slight increase of physical import volumes (index value 100.9).

Foreign direct investments Net FDI , USD m Net FDI in October 2016 increased USD 45 m. All of them were allocated to real sector of economy; Net FDI in Jan-Oct 2016 were USD 3.1 bn, compared with USD 2.2 bn in Jan-Oct 2015. Increase was ensured mostly by conversion of Ukrainian banks debt to their foreign parents banks into equity; Net FDI inflows in 2015 were USD 3.0 bn, compared with USD 0.3 bn in 2014 (10-times increase).

Reserves and external debt Gross International Reserves, months of import coverage Gross international reserves (GIR) of NBU declined to USD 15.3 bn as of 1 Dec 2016, compared with USD 15.5 bn as of 1 Nov 2016; GIR are equal to 3.6 months of import coverage; GIR are well above the lowest point – USD 5.6 bn, or 1 month of import coverage, - reached at the end of February 2015; Net international reserves (NIR) of NBU in November declined to USD 3.9 bn, compared with USD 4.0 bn month ago. External Debt, eop USD bn External debt grew to USD 116.0 bn at the end of the 3Q’2016, compared with USD 115.0 bn at the end of the 2Q’2016; External debt declined significantly, compared with the historical maximum level (USD 142.1 bn as of 1 Jan 2014).

Budget Surplus of consolidated budget in October was UAH 4.8 bn; Balance of consolidated budget, UAH bn Balance of consolidated budget, % of GDP Surplus of consolidated budget in October was UAH 4.8 bn; In Jan-Oct 2016 deficit was UAH 26.9 bn, compared with surplus UAH 26.8 bn year ago; Deficit of consolidated budget declined from UAH 72 bn to UAH 31 bn in 2015, or from 4.5% to 1.6% of GDP.

Public and publicly guaranteed debt Nominal values, bn % of GDP Public and publicly guaranteed debt increased from 69.4% to 80.1% of GDP during 2015. Increase in 2015 (+10.7% of GDP) was much less than in 2014 (+29.5% of GDP). Large part of Debt/GDP ratio growth was due to GDP contraction (-9.9% in 2015). In Jan-Oct’2016 public and publicly guaranteed debt grew from UAH 1 572 bn to UAH 1 743 bn. At the same time, debt grew from USD 65.5 bn to USD 68.4 bn. Debt/GDP ratio is expected to reach 90.3% by the end of 2016. It coincides with Euro Area Government debt at the end of 2015 – 90.4% of GDP.

Monetary policy: rate of exchange and interest rates USD/UAH official exchange rate USD/UAH remains broadly stable. Average official exchange rate from 1 to 26 of December was 26.11. Hryvnia depreciated 1.6%, compared with November average values; UAH depreciation to USD, compared with average Dec-2015 rates, was 10.4%. NBU discount rate On Dec 8 NBU kept discount rate unchanged - 14.0%. Last change of discount rate (cut from 15.0% to 14.0%) was in October 2016; Interest rate on overnight liquidity providing transactions kept 16.0% (discount rate + 2%); Interest rate on overnight certificates of deposit kept 12.0% (discount rate – 2%); Next NBU meeting on interest rates will be on Jan 26 2017.

Monetary policy: money supply Cash (M0), % change compared with the same month of the previous year Monetary base, % change compared with the same month of the previous year In November: M0 declined UAH 3.4 bn, or 1.2%, to UAH 289.7 bn; Monetary base grew UAH 2.9 bn, or 0.8%, to UAH 357.6 bn. Annual (December 2015 – November 2016) growth of monetary base was UAH 36.4 bn, or 11.3%. At the same period, M0 increased UAH 16.7 bn, or 6.1%.

Insolvent Banks (as of 26 Dec 2016) Number of banks classified insolvent 3 banks (Trust, Investbank and Privatbank) have been recognized insolvent in December. Privatbank was recapitalized by the government and returned to normal mode of work; After Privatbank recapitalization, market share of government controlled banks increased to 53%, share of subsidiaries of foreign banking groups remained at 34%. Market share of other banks declined to 13%; 22 banks have been recognized insolvent or decided to leave the market since the start of the year; 88 banks have been recognized insolvent by the NBU Resolutions or decided to leave the market since 01.01.2014, of which: 1 bank (Privatbank) has been sold to government; 1 bank (Astra) has been sold to private investors; 5 banks (Rodovid, Unison, Finansova Iniciatyva, Trust and Investbank) are managed by provisional administrations; 80 banks are under liquidation procedures. 96 banks continue to work in normal mode (as of Dec 26).

Households deposits, bn In November hryvnia deposits grew 0.3%, to UAH 193.4 bn. Growth since the start of the year was 2.7%; In November FX deposits portfolio declined 0.8%, to USD 8.7 bn. Decline since the start of the year was 0.6%. Corporate deposits, bn In November hryvnia deposit portfolio declined 0.8%, to UAH 214.9 bn. Deposit portfolio in Jan-Nov 2016 grew 5.7%; In November FX deposits declined 4.5%, to USD 4.8 bn. Growth since the start of the year was 5.3%.

Credits Households credits, bn FX credit portfolio in November declined 1.4%, to USD 3.2 bn. Decline since the start of the year was 17.4%, annual decline – 22.3%; Volume of FX credits declined 88%, compared with USD 26.8 bn as of 1 Oct 2008 (historical maximum level); UAH credit portfolio declined UAH 0.2 bn (or 0.3%), to UAH 74.4 bn, in November. UAH credit portfolio decline since the start of the year was 4.1%, annual decline – 6.7%. Corporate credits, bn In November FX credit portfolio declined USD 1.2 bn (or 7.3%), to USD 15.3 bn. Decline since the start of the year was 19.2%, annual decline - 23.1%; In November UAH credit portfolio increased UAH 30.3 bn (or 7.5%), to UAH 434.7 bn. Increase since the start of the year was 23.2%, annual increase - 13.9%.