Business and NBU discuss key macroeconomic forecasts

19/ 07/ 2019

The NBU has revised projected GDP growth in 2019-2020. This year GDP growth will be 3% (previous forecast growth was 2.5%), in 2020 the rate will reach 3.2% (previously - 2.9%). At the same time, the inflation forecast remained at the level projected at the beginning of the year - 6.3% in 2019 and 5% in 2020. This was stated on July 19 at the European Business Association meeting on banking regulation with representatives of the NBU. During the discussion NBU Chairman Yakov Smolij informed that since April the National Bank has started a cycle of lowering the discount rate and today it is at the level of 17%. This year there were already two gradual reductions of a half a percent - in July and in April. At the same time, NBU plans to publish an interest rate forecast (within the framework of a quarterly revision of the macroeconomic forecast). The first forecast released last week. It stipulates a further reduction of the discount rate to 8% over the next years, and provides information about the inflation rate remaining at 5%. The floating exchange rate policy is set to continue. In addition, Mr. Smoliy stressed that in 2019, the current account deficit would narrow to 2.6% of GDP, driven by high grain yields, lower energy prices and reduced repatriation of dividends. Regarding cooperation with the IMF, Smolii said that further cooperation between Ukraine and the international organization is extremely important for maintaining macro-financial stability, and it is high time for Ukraine to discuss a new cooperation program. However, the issue is not about IMF or default – as it has no real basis. Instead, among the possible risks that could make the economy vulnerable and destabilize inflation, Smolij noted the slowdown in reforms, the complete cessation of transit of gas from Russia to Ukraine, the strengthening of trade wars and the escalation of the military conflict in the East. For his part, Tomas Fiala, CEO of Dragon Capital, praised the quality of monetary policy, forecasting and communication of the NBU. After clearing and recapitalizing, the banking sector is showing high profitability, with an average return on equity of over 30% this year. This will accelerate the growth of lending to the economy in the near future. Announced yesterday, improvements in NBU forecasts for GDP growth and current account deficits are in line with our newly improved expectations. We also revised the forecast for the UAH rate at the end of the year from 29.7 UAH / USD to 27.5 UAH / USD, and in relation to debt to GDP to 54%, which makes any conversations about default irrelevant”, - he added. Among the possible challenges, Fiala noted the independence of the NBU, which should be preserved. After all, an issue was the bill on lustration, which, among other things, concerns the direction of the NBU. Also, court decisions on the possible return of Privatbank to the previous shareholders are alarming. In general, the mood of investors is positive, although business awaits the results of Sundays elections and the composition of the Cabinet of Ministers. At the same time, yesterdays promise by the President that after the elections there will be a professional technocratic Government, was perceived very positively. Volodymyr Lavrenchuk, chairman of the board of Raiffeisen Bank Aval stressed that there are so many variables now, and mostly they are positive, that it is difficult to measure the effect of currency liberalization. In general, stabilization is not a consequence of one step, but a set of factors important for the Ukrainian economy. At the same time, the complexity of the task today is that there are almost no direct long-term investments, but there is a large influx of short-term ones. So, business behavior with money is short-term and it is a significant threat to the banking sector. At the same time, the forecast of interest rates introduced by the NBU provides a benchmark for market participants and an opportunity to look more confidently ahead. The voice of the retail industry was presented by Igor Landa, CEO Novus Ukraine. He noted that improvement in retail is also felt. After all, a stable market improves the purchasing power of consumers. For example, over the past 2 years, card payments for food products have increased from 38% to 50%, but, unfortunately, the cost of banking services for business has increased. Therefore, it is important to discuss jointly decisions that are made and directly related to business. As, for example, the situation with rounding that has questions concerning its efficiency. In general, businesses perceive the changes with a positive attitude.

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The NBU has revised projected GDP growth in 2019-2020. This year GDP growth will be 3% (previous forecast growth was 2.5%), in 2020 the rate will reach 3.2% (previously – 2.9%). At the same time, the inflation forecast remained at the level projected at the beginning of the year – 6.3% in 2019 and 5% in 2020. This was stated on July 19 at the European Business Association meeting on banking regulation with representatives of the NBU.

During the discussion NBU Chairman Yakov Smolij informed that since April the National Bank has started a cycle of lowering the discount rate and today it is at the level of 17%. This year there were already two gradual reductions of a half a percent – in July and in April.

At the same time, NBU plans to publish an interest rate forecast (within the framework of a quarterly revision of the macroeconomic forecast). The first forecast released last week. It stipulates a further reduction of the discount rate to 8% over the next years, and provides information about the inflation rate remaining at 5%. The floating exchange rate policy is set to continue.

In addition, Mr. Smoliy stressed that in 2019, the current account deficit would narrow to 2.6% of GDP, driven by high grain yields, lower energy prices and reduced repatriation of dividends.

Regarding cooperation with the IMF, Smolii said that further cooperation between Ukraine and the international organization is extremely important for maintaining macro-financial stability, and it is high time for Ukraine to discuss a new cooperation program. However, the issue is not about “IMF or default” – as it has no real basis.

Instead, among the possible risks that could make the economy vulnerable and destabilize inflation, Smolij noted the slowdown in reforms, the complete cessation of transit of gas from Russia to Ukraine, the strengthening of trade wars and the escalation of the military conflict in the East.

For his part, Tomas Fiala, CEO of Dragon Capital, praised the quality of monetary policy, forecasting and communication of the NBU. After clearing and recapitalizing, the banking sector is showing high profitability, with an average return on equity of over 30% this year. This will accelerate the growth of lending to the economy in the near future. “Announced yesterday, improvements in NBU forecasts for GDP growth and current account deficits are in line with our newly improved expectations. We also revised the forecast for the UAH rate at the end of the year from 29.7 UAH / USD to 27.5 UAH / USD, and in relation to debt to GDP to 54%, which makes any conversations about default irrelevant”, – he added.

Among the possible challenges, Fiala noted the independence of the NBU, which should be preserved. After all, an issue was the bill on lustration, which, among other things, concerns the direction of the NBU. Also, court decisions on the possible return of Privatbank to the previous shareholders are alarming. In general, the mood of investors is positive, although business awaits the results of Sunday’s elections and the composition of the Cabinet of Ministers. At the same time, yesterday’s promise by the President that after the elections there will be a professional technocratic Government, was perceived very positively.

Volodymyr Lavrenchuk, chairman of the board of Raiffeisen Bank Aval stressed that there are so many variables now, and mostly they are positive, that it is difficult to measure the effect of currency liberalization. In general, stabilization is not a consequence of one step, but a set of factors important for the Ukrainian economy. At the same time, the complexity of the task today is that there are almost no direct long-term investments, but there is a large influx of short-term ones. So, business behavior with money is short-term and it is a significant threat to the banking sector. At the same time, the forecast of interest rates introduced by the NBU provides a benchmark for market participants and an opportunity to look more confidently ahead.

The voice of the retail industry was presented by Igor Landa, CEO Novus Ukraine. He noted that improvement in retail is also felt. After all, a stable market improves the purchasing power of consumers. For example, over the past 2 years, card payments for food products have increased from 38% to 50%, but, unfortunately, the cost of banking services for business has increased. Therefore, it is important to discuss jointly decisions that are made and directly related to business. As, for example, the situation with rounding that has questions concerning its efficiency. In general, businesses perceive the changes with a positive attitude.