After suffering the highest annual inflation in seven years in 2007, Ukraine’s growth and price increases will slow and stabilize this year, experts said.
The nation’s gross domestic product (GDP) grew 7.2 percent in 2007, while inflation was 16.6 percent.
Fixed investment and household consumption will drive growth of the country’s GDP, while energy imports remain the greatest inflationary risk, experts said.
“The Ukrainian economy has experienced strong growth since 2000,” reported the Kyiv offices of ING, a leading Dutch bank. “However, we expect a mild slowdown this year caused by the expected general deceleration in developed markets.”
The bank lending boom, small business development, money from Ukrainians working abroad and salary growth will fuel increased consumption. “We expect household consumption to remain the major GDP growth driver during 2008 and 2009,” said Vitaliy Vavryshchuk, Dragon Capital analyst. Rising salaries and social payments will boost consumer demand in 2008, stimulating rapid growth of consumer-oriented sectors, such as food, services, and retail, said Anna Cherednichenko, an International Centre for Policy Studies (ICPS) economist.
Foreign direct investment (FDI) will continue to grow in 2008. “Rapid economic growth will continue to foster demand for Ukrainian assets,” ICPS reported, adding “FDI will grow from $8 billion in 2007 to $8.5 billion in 2008.”
Sergiy Kulpynskiy of Alfa Capital said agriculture and initial public offerings (IPOs) could draw in as much as $9 billion in fresh FDI.
High inflation will be the main economic risk in 2008, according to ICPS. Energy imports will not be the only factor driving prices higher.
Consumer demand could exceed supply, driving prices upward, Dragon Capital reported.
The consumer credit boom could be another factor fueling inflation. Spending may soon outstrip income, Kulpynskiy said.
Prime Minister Tymoshenko’s savings remittance program poses minimal inflation risk, economists agreed. Inflation is expected to rise less than half a percent due the program, Kulpynskiy said.
But most significantly, Russian and Central Asian prices may rise as much as 38 percent this year, ICPS forecasted.
That could hit Ukrainian companies hard, particularly those that are slow to implement energy efficient technologies, analysts said.
The National Bank of Ukraine predicted inflation of 15 percent this year. Analysts estimates ranged between nine and 15 percent.
To ensure stable economic growth, the government will keep the hryvnia pegged to the dollar, analysts reported. The dollar’s drop on currency markets and potential US recession may force a re-evaluation.
Domestically, Ukraine’s delicate political landscape could destabilize and threaten economic stability, analysts said. However, “we expect the coalition’s arrival won’t lead to changes in economic policy,” ICPS said. “The government’s priority activity in 2008 will be fulfilling social promises.”
