Inflation in Ukraine will fall in 2016 to 12.3 percent, around quarter of the 20-year high it is expected to record in 2015, raising chances for a war-torn economy to return to modest growth, a Reuters survey showed on Wednesday. Analysts predicted Ukraine's gross domestic product will contract by 11.0 percent in 2015, but grow by 1.9 percent in 2016. The IMF expects Ukraine's GDP to grow 2.0 percent in 2016, while Ukraine's central bank sees the economy growing 2.4 percent.
The positive trend will continue as the economy shakes off the negative effect of a sharp depreciation in the value of the national hryvnia currency and government-mandated utility price increases earlier this year, analysts said. Analysts of 12 Ukrainian banks and brokerages polled by Reuters this month forecast inflation slowing to 12.3 percent in 2016 from the 46.7 percent expected by the end of this year.
In April the consumer price index reached a peak of 60.9 percent year-on-year and has gradually decreased to 51.9 percent in September. Analysts do not expect any further dramatic falls in the hryvnia or a significant rise in utility tariffs, which have been the main reasons for rising consumer prices in 2015. "Since in 2016... such a sharp rise in utility tariffs and exchange rate fall are not expected, we may count on a slowdown in inflation," Olexander Sokolov of Pro-Consulting investment company said.
Analysts of Raiffeisen Bank Aval expect a significant slowdown in inflation in the first months of next year to about 14-16 percent by April or May. The Ukrainian hryvnia weakened by 25 percent this year after it lost half of its value against the dollar last year. This made foreign goods very expensive and resulted in a sharp fall in the volume of imports.
There are other signs that the Ukrainian economy is turning a corner and can return to growth, following two years of recession partly due to the financial toll of a separatist conflict in industrial eastern regions. The current account deficit, which stood at $4.6 billion in 2014, has narrowed to $2 million in January-September of 2015, while foreign reserves have been boosted by international loans to $12.8 billion as of October 1 after they hit a ten-year low in February.
The head of the National Bank, Valeria Gontareva, has said there are no fundamental reasons for further weakening of the hryvnia as the trade balance has improved, while the debt burden has been eased via a $15 billion restructuring deal in October. The slowdown in inflation will lead to a reduction in bank interest rates and encourage the lending that is vital for economic recovery. But there are potential pitfalls.
"Even such modest developments will only be viable if there are no new shocks to the economy, ie assuming neither a substantial reescalation of the Donbass (eastern) conflict, nor a political, nor currency crisis in the months ahead," analysts for Raiffeisen Bank Aval said in a report. Pro-Russian separatists seized eastern areas of Ukraine in last year amid fierce fighting. A cease-fire agreed between government forces and rebels in September has largely held but dangers of a resurgence have not disappeared and the conflict has stoked political rivalries in Kiev.
Reuters polled analysts at Alfa Bank (Ukraine), CASE (Ukraine), Concorde Capital, Credit Rating, Da Vinci AG, International Centre for Policy Studies, Institute for Economic Research and Political Consulting, Raiffeisen Bank Aval, First Ukrainian International Bank, Capital Times, Pro-Consulting, Inter business Consulting.