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SEB's Economic Insights: Ukraine moves into deeper economic crisis

SEB's Economic Insights: Ukraine moves into deeper economic crisis

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Published by SEB Group
I the wake of political unrest, SEB’s economists are lowering their GDP growth forecast for Ukraine further. They now see GDP decline by 1.6 per cent in 2013 before rising by a bleak 0.5 per cent in 2014. The economists also see an increased risk of devaluation.
I the wake of political unrest, SEB’s economists are lowering their GDP growth forecast for Ukraine further. They now see GDP decline by 1.6 per cent in 2013 before rising by a bleak 0.5 per cent in 2014. The economists also see an increased risk of devaluation.

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Categories:Types, Business/Law
Published by: SEB Group on Dec 03, 2013
Copyright:Attribution Non-commercial

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01/27/2014

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This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document
1
 are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document Changes may be made to opinions or information contained herein without notice. Any US person wishing to obtain further information about this report should contact the New York branch of the Bank which has distributed this report in the US. Skandinaviska Enskilda Banken AB (publ) is a member of London Stock Exchange. It is regulated by the Securities and Futures Authority for the conduct of investment business in the UK.
Political unrest leads Ukraine intodeeper economic crisis
Increased risk of devaluation
TUESDAY
DECEMBER 3, 2013
Severe political unrest in Ukraine is expected to have negative effects on the already recession plagued economy. Domestic demand prospects for 2014 now look even weaker, although exports will get some support from an expected devaluation – the devaluation risk has risen after Kiev took a sudden pause to increased EU integration. We are lowering our GDP growth forecast further, mainly for 2014. GDP is expected to decline by 1.6 per cent in 2013 (-1.4 per cent in Nordic Outlook, November 2013), then rise by a bleak 0.5 per cent in 2014 (1.7 per cent in latest NO). This is clearly below the consensus view -0.8 per cent and +1.1 per cent, respectively.
Ukraine’s President Viktor Yanukovich’s refusal to sign an EU deal in Vilnius last Friday has sparked the biggest protests since the 2004 Orange Revolution. The protests can be read as the people’s will to integrate more and faster with the Western Europe. However, the protests do not mean Ukraine is united in this respective. Since independence, the population of Ukraine has been divided concerning the country’s orientation towards the EU or Russia. Since Yanukovich assumed office February 25, 2010, he seems to have prioritised the ambition to expand Ukraine’s ties with the EU, while trying to preserve good relations with Russia. But is Yanukovich now rather leading Ukraine towards increased Russian integration? Before the Vilnius summit, where Ukraine was scheduled to sign the EU trade and association deal, Russia exercised trade and energy pressures against Ukraine. President Putin has launched a customs union with Belarus and Kazakhstan and has declared that he want other former Soviet republics to join. The Russian-led CIS customs union is set to be deepened by 2015 into a “Eurasian Economic Union”. At the Vilnius summit, however, Yanukovich said that his ambition still is to sign the EU Association Agreement in the spring of 2014. In brief, this is the background to the
rising political uncertainty in Ukraine
 – which is now
eroding confidence in financial markets and will affect the real economy going forward
. On December 2, 2013, the yield on the junk-rated sovereign USD bonds due June 2014 jumped 274 basis points to a record 19.34 per cent.
The economic situation is fragile. Ukraine’s weak performance
 since late 2012
turned into a rapidly deepening crisis this autumn
. Third quarter GDP was down 1.5 per cent year-on-year: the fifth straight quarter of negative growth. The economy is being squeezed by falling steel exports, lower Russian demand and an overvalued currency. This helps explain why the current account deficit  jumped to 8 per cent in 2012
 – 
 unsustainable in the long term. We expect no major improvement in 2013. Financial market confidence in Ukraine is severely strained and worsened during last summer’s global turmoil related to future Fed exit policy. On November 1, S&P also lowered Ukraine’s credit rating to the same junk status (B-) as Greece. The current account deficit and central bank interventions to support the hryvnia this past year have depleted the

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