Interfax: Ukraine’s GDP could contract by 5% in 2014 – Fitch

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MOSCOW. June 2 (Interfax) – Fitch Ratings forecasts that Ukraine’s GDP will contract by 5% in 2014, the ratings agency said in a statement.

“The crisis will continue to weigh on Ukraine’s economy. We forecast GDP to contract by 5% this year. Ex-Crimea, industrial production shrank 6% year on year in April, and consumer spending is well down, especially in the east. Inflation in April was 3.3%, but Fitch expects it to rise due to gas tariffs and pass-through of exchange rate depreciation. Public finances are under pressure but the government has increased tax collection and contained spending, narrowing the fiscal deficit,” the statement reads.

The agency said the May 25 presidential elections provide a certain support for the country’s creditworthiness by reducing short-term political uncertainty and potentially foreshadow an improvement in relations with Russia.

I n addition, the elections do not lower Ukraine’s risks, which are reflected in the sovereign foreign currency rating, which is “CCC,” Fitch said.

The agency said Ukraine’s biggest problems are connected with unrest in the country’s east, disputes with Russia concerning gas payments, carrying out the country’s obligations under the IMF program and supporting foreign currency reserves.

“Some immediate risks have receded. The disbursement of $3.2bn by the IMF and issuance of a $1bn bond guaranteed by the US on May 16 eased immediate external liquidity concerns and covers Ukraine’s scheduled $1bn Eurobond maturity next week. But external repayments remain heavy in 2014, including Naftogaz’s government-guaranteed September Eurobond,” the agency added.

Maintaining access to foreign financing will be important for Ukraine, as will following the requirements of the IMF program. At the same time, the risk connected with the IMF program is still very high becau se of the public’s possible opposition against increased prices for gas and other reforms. This risk also concerns Ukraine’s dependence on access to the Russian market. In addition, the continuation of military action threatens an overall escalation in tension in the country.

Fitch said a rise in Ukraine’s ratings could be brought about by factors such as political stabilization, solid economic growth and a decrease in budgetary and foreign imbalances.

As was reported, the European Bank for Reconstruction and Development (EBRD) anticipates that the Ukrainian economy will decrease by 7% in 2014 instead of rising by 1.5%, as predicted in October 2013.

The EBRD said that the Ukrainian economy would show no growth in 2015 under the EBRD’s most likely scenario.

The Ukrainian government and the International Monetary Fund early in May 2014 revised their forecasts for Ukraine’s GDP, projecting it will decline by 5% in 2014, but will grow by 2% in 2015.

Map of Ukraine, Including Crimea, and Neighbors, Including Russia