Ukraine sees 12% GDP drop, 43% inflation as 2015 pessimistic scenario

Макроэкономика 06.03.2015 The Ukrainian government foresees three scenarios for the economy's development in 2015, according to a Cabinet resolution approved on Feb. 14 and made public on March 5. The first scenario consists of GDP contracting 5.5% and consumer prices rising 26.7% YTD, the second consists of real GDP declining 8.6% and CPI advancing 38.1% YTD and the worst consists of real GDP dropping 11.9% and CPI surging 42.8% YTD. Ukraine’s nominal GDP is estimated at UAH 1,850 bln, UAH 1,831 bln and UAH 1,793 bln under the three respective scenarios. The government expects real GDP will increase 2.0% in 2016 and 3.5% in 2017 under the most optimistic scenario. Under the most pessimistic one, GDP will decline 7% in 2016 and 3% in 2017. The Cabinet previously considered two scenarios for 2015: a 2.0% real GDP decline and 11.2% CPI YTD gain and a 4.3% real GDP drop and 13.1% CPI YTD advance. Alexander Paraschiy: Such a wide range between the base-line scenario (5.5% GDP decline) and worst-case scenario (11.9% GDP decline) for 2015 means that the authorities have a poor vision of Ukraine’s economic future. That’s not a surprise given that there is big uncertainty regarding the development of the situation in the eastern Ukraine. We believe the worst case is only possible should the situation in the eastern regions escalate and the Cabinet make serious mistakes, such as authorizing heavy printing for fiscal needs, which could trigger hyperinflation. We are more optimistic, seeing all the chances for economic stabilization starting 2H15 if the Cabinet sticks to fiscal prudence and avoids populist decisions throughout the year. So far, we predict only a 3.8% GDP decline in 2015, including improved GDP statistics in 2H15 due to a low statistical base.