GDP: The Institute revised downwards the forecast for 2014 and 2015 to take into account increasingly devastating effects of prolonged military conflict in Donbas. Real GDP is expected to decline by 7.6% in 2014 and 2.2% in 2015. GDP projected for the next year represents significant improvement of economic activity as compared to the second half of 2014 and we expect that most regions of Ukraine will be able to increase their output in the 2015.

However, risks of the forecast remain high. The main risk for the forecast is an escalation of military conflict, which would result in larger disruptions in production and infrastructure and deficits of critical goods. At the same time, full-scale wartime mobilization (in particular if coupled with external assistance) may provide boost to the output.

Fiscal Indicators: Fiscal pressure will remain high pushing the Government to increase efficiency of public spending, cut public sector employment and wages and implement further revenue-raising measures. Still, direct and guaranteed government debt is expected to approach 70% of GDP in 2014 and in 2015.

Balance of Payments: In 2014 current account deficit is expected to shrink to 4.3% of GDP and financial account deficit is estimated at 2.7% of GDP. Balance of payment is forecasted to be in surplus in 2015.

Monetary Survey: In the next fifteen months inflation will be supported by lagged effects of hryvnia depreciation as well as high inflation expectations. Overall inflation may return to the single digits in the last quarter of 2015 reaching 8.5% yoy in December. We project exchange rate to strengthen slightly over 2015 with average exchange rate at UAH 13 per USD.

Key forecast figures for baseline scenario

Forecast calculations were completed on September 26, 2014.

Authors: Oleksandra Betliy, Vitaliy Kravchuk, Mykola Ryzhenkov, Oleksa Stepaniuk, Artur Kovalchuk