11:28 08.09.2021

Dragon Capital downgrades Ukraine's GDP growth forecast for 2021 to 3.5%

4 min read
Dragon Capital downgrades Ukraine's GDP growth forecast for 2021 to 3.5%

 Investment company Dragon Capital has downgraded its forecast for Ukrainian economic growth in 2021 from 4.6% to 3.5% due to unexpectedly worse-than-expected preliminary GDP data for the second quarter of this year, the founder and CEO of the company Tomas Fiala has said.

"[Published by the State Statistics Service] the results of the second quarter were much worse than everyone expected: only 5.4% instead of about 7-8%, which everyone expected. This second quarter result surprised both local and global banks," he said in an exclusive interview with Interfax-Ukraine.

As Fiala noted, one of the reasons for such an assessment from the State Statistics Service was the wholesale trade, which has a fairly large share in GDP, the fall of which accelerated to 5.7% in the first half of the year from 3.0% in the first quarter.

"This is a very unexpected figure, because all related sectors are growing, and retail trade is growing quite rapidly. The question arises as to how the State Statistics Service works and compiles these reports. On September 14, more detailed data on wholesale trade will be released, and on September 20, data on GDP. We will see there. But it is not yet clear why wholesale trade could have dropped so much," the head of Dragon Capital said.

He recalled that in the middle of July, the investment company had already lowered the forecast for the growth of the Ukrainian economy this year – from 5.3% to 4.6%. At the same time, Fiala said that next year's estimate of real GDP growth remains unchanged at 4.3%.

According to the head of Dragon Capital, the external environment for Ukraine is currently very favorable: prices for its exports have increased, the cost of money in the world remains low, and the likelihood of a long-term rise in inflation in the world and a sharp reversal of the policy of the leading central banks of the markets is still small.

"But, of course, the government and the country's leadership should bear in mind that this situation will not always be. Therefore, it is necessary, first of all, to keep the monetary and fiscal policy conservative and reduce the deficit [of the state budget] to 3% of GDP," Fiala said.

According to Dragon Capital estimates, the deficit of the state budget of Ukraine in 2021 will be about 3.9% of GDP instead of 5.2% laid down in the state budget. "It won't be possible to attract funding for a larger deficit, even with the current good market conditions," Fiala said.

He said that the rollover on government bonds is about 97%. That is, the Ministry of Finance borrows less in the domestic market than it needs to pay off old debts, and attracts funds to finance the deficit through eurobonds, World Bank loans or EU macro-financial assistance, the second tranche of which is expected to be worth EUR 600 million in the middle of September.

Commenting on the growth of state budget receipts, the investment banker explained them with a high deflator – at about 20%, an increase in imports and a tax on profits, especially of commodity companies.

According to the head of Dragon Capital, the monetary policy of the National Bank since the middle of last year, when its leadership was changed, remains competent, and the decision to terminate the long-term refinancing program involving government bonds from October 1 adds positive assessments to the NBU.

Speaking of risks, Fiala still named Russia as risk number one. "Unfortunately, it [this risk] does not disappear anywhere. Russia will always create problems for us, so this is the main problem," he said.

The head of Dragon Capital said that the second risk is a possible deterioration in the commodity and financial markets, and the third is a rollback in the reforms.

Fiala recalled that since 2014, all business associations have been convincing the Ukrainian government of the need to create a new law enforcement agency instead of the tax police, the Economic Crime Department in the Ministry of Internal Affairs and the "K" Department in the SBU [fights corruption and organized crime]. It must work in a new way: without corruption, with qualified personnel with market salaries.

According to him, the business expected a complete separation from the previous experience, and the government appointed the former head of one of the agencies, who in the past put pressure on business, was the reason for the poor business climate and low investment, as director of the Bureau of Economic Security.

"Time will tell, but the first signal is alarming. We feel like giving up when business is involved in dialog, you express your wishes to the government, and it ignores them," Fiala said.

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