Ukraine 2Q14 GDP revised up to 4.6% yoy drop

Макроэкономика 11.09.2014 Ukraine’s 2Q14 GDP estimate was revised to a 4.6% yoy drop, from a 4.7% yoy drop estimated previously, according to state statistics released on Sept. 10. The main driver of the decline was falling investments in fixed assets (-18.5% yoy), while household consumption declined modestly (-2.3% yoy) and government consumption grew 6.9% yoy. Nominal GDP was reported at UAH 372.8 bln, thus reflecting an 11.1% yoy GDP deflator growth in 2Q14. Alexander Paraschiy: Unfortunately, the 2Q14 GDP statistics don’t tell us anything about the future prospects of the Ukrainian economy. The situation began changing very fast in August, so we will see a very different picture from what it was a few months ago. In particular, industry in the Donetsk and Luhansk regions has been devastated from escalated warfare. Consumption sentiments have sunk deeper in red and investments are digging further into negative numbers. Against this backdrop, calibrating the speed of economic decline is complicated but from the numbers we have at hand (already in July, industrial output declined 12.1% yoy), we expect the GDP decline will be at least 7% yoy in 2014, even assuming a de-escalated military conflict till the year end. If the war does not ease, we won’t be surprised to see an annual two-digit GDP decline by the year end. Such a radical decline in GDP would aggravate risks for Ukraine’s sovereign debt, causing the debt-to-GDP ratio to exceed an important level of 0.6x. The covenant of non-exceeding this threshold is written in the prospectus for the Eurobond that the Ukrainian government issued in December 2013. This entire issue – of two-year, USD 3 bln Eurobonds – was purchased by the Russian government as a part of a Dec. 17 pact between the Russian and Ukrainian presidents.