This document provides an economic overview and analysis of Ukraine. It discusses Ukraine's return to international bond markets in September 2017, raising $3 billion. Two key reforms were passed in October that should allow Ukraine to receive its next IMF loan tranche. GDP growth was estimated at 2.3% in Q2 2017 due to growth in household consumption and investment. Inflation remained high at 16.2% in August despite a seasonal decline in food prices. Producer price inflation accelerated to 23.6% in August.

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Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
September 2017
Ukraine: Sovereign ratings
LCYrating S&P Moody's Fitch
Long-term B- Caa2 B-
Short-term B n.a. n.a.
Outlook Stable Positive Stable
FCYrating
Long-term B- Caa2 B-
Short-term B n.a. B
Outlook Stable Positive Stable
Latestreview Dec-16 Aug-17 Apr-17
Source: Thomson Reuters, RBI/Raiffeisen RESEARCH
Ukraine: Key economic figures and forecasts
Real Sector 2013 2014 2015 2016 2017e 2018f
GDP (UAH bn) 1,465 1,587 1,989 2,383 2,888 3,251
GDP (% yoy) 0.0 -6.6 -9.8 2.3 1.5 3.0
Domestic demand (% yoy) 1.7 -11.6 -12.2 8.2 2.4 0.4
Terms of trade (% yoy) 2.1 2.1 -2.1 1.2 -0.9 -1.5
CPI (avg, % yoy) -0.3 12.1 48.7 13.9 13.6 7.8
CPI (eop, % yoy) 0.5 24.9 43.3 12.4 11.0 6.5
PPI (eop, % yoy) 1.7 31.8 25.4 35.7 11.7 8.8
Real disposable income (% yoy) 5.3 -8.4 -22.3 0.3 n/a n/a
ExternalSector
C/A balance (% of GDP) -9.2 -3.5 -0.2 -3.6 -3.9 -3.4
Goods export (% yoy) -8.3 -14.5 -29.9 -5.2 9.2 3.7
Goods import (% yoy) -5.8 -29.0 -32.6 4.4 11.2 6.4
FDI (USD bn) 4.1 0.3 3.0 3.4 2.3 3.0
Total external debt (% of GDP) 79.1 95.7 131.7 121.7 109.6 102.2
Gross FX reserves (USD bn) 20.4 7.5 13.3 15.5 20.0 23.1
MonetarySector
USD/UAH (eop) 8.24 15.82 24.03 27.10 27.00 28.50
FiscalSector
Central state deficit (% of GDP) 4.4 4.9 2.3 2.9 3.1 2.6
Public debt (% of GDP) 40.7 52.9 72.6 76.1 70.3 64.7
Source: State Statistics Service, National Bank of Ukraine, Ministry of Finance, RBI/Raiffeisen RESEARCH
Highlights
 In September, Ukraine returned to the Eurobond market, issuing USD 3 bn with a
maturity of 15 years at a yield of 7.375%. The return to the market happened
amidst a highly supportive global market environment, but also due to regained
financial stability and reform progress at home. As Ukraine repurchased
outstanding bond issues due in 2019 and 2020, repayment risks have fallen.
 Ukraine adopted a juridical and a pension reform in Parliament, which should
accelerate the approval of another IMF loan tranche. Now much depends on the
implementation of these reforms. However, a land reform has been postponed,
which might reduce the amount of a prospective IMF payout.
 Healthy economic growth continued: GDP increased by 2.3% yoy and 0.6%
qoq in the second quarter on a cyclical rebound in private household demand
and a surge in investment from low levels. The economic blockade in Donbas hit
less than expected, opening an upside to our cautious GDP estimate of 1.5%
growth for this year.
 Inflation remained at an elevated level of 16.2% yoy in August, but with a
negligible mom decline from July. Nevertheless, the higher than anticipated
inflation kept the NBU from lowering further the key rate. With some fiscal
loosening ahead, the NBU might even switch into reverse gear and tighten
policy, i.e. hike the rate in coming months (in case of growing inflationary risks).
 The UAH lost some of its strength on seasonal factors moving higher to
USD/UAH 26.60. Further depreciation risks are partly mitigated by the
improved external financing situation given the recent bond issue.
Source: State Statistics Service, RBI/Raiffeisen RESEARCH
GDP growth and inflation
-50
-25
0
25
50
-15
-10
-5
0
5
10
15
GDP (% yoy) Inflation (eop, % yoy), r.h.s.
Financial Analysts
Sergii Drobot, Raiffeisen Bank Aval, Kyiv
Ukraine Economist
+380 44 5905621
sergii.drobot@aval.ua
Andreas Schwabe, CFA, RBI Vienna
Senior Economist CEE
+43 1 71707 1389
andreas.schwabe@rbinternational.com
Editor:
Elena Romanova, MSc, RBI Vienna
CEE Banking Research
+43 1 71707 761378
elena.romanova@rbinternational.com

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Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
Economic Policy
In September, Ukraine returned to the market of international
borrowings for the first time in 4 years. The new Eurobond issue
amounted to USD 3 bn with final maturity in 15 years (on 25 September
2032), amortizing in four equal instalments on 25 March 2031, 25
September 2031, 25 March 2032 and 25 September 2032. The demand
was surprisingly high – USD 9.5 bn with about 350 investors bidding. The
bond’s interest rate amounted to 7.375% at placement. In order to lower debt
burden in 2019-2020, the Ministry of Finance decided to use virtually half of
the placement’s net proceeds to repurchase USD 1.2 bn of its notes due 2019
and USD 0.4 bn notes due 2020. Thus, Ukraine managed to reduce its peek
debt payments in 2019-2020, which we view as a positive factor for financial
stability improvement of the country, especially given the fact that 2019 is an
election year. Nevertheless, the external debt payments stay high in the next
few years, pressing for acceleration of reforms and on-going cooperation with
the IMF.
In the beginning of October, Ukraine proceeded with two reforms
that should accelerate the approval of the next IMF tranche, in
our view. First, the Parliament adopted a judicial reform, which is an
important step in combating corruption. Moreover, the pension reform, which
is within the core IMF requirements, was approved on October 3. In case the
reforms will see an active start, we expect Ukraine to gain good chances to
finalize the fourth review soon, after the next Fund’s technical mission to Kyiv.
Initially, the volume of the upcoming tranche was planned at USD 1.9 bn.
However, now given the significant delay due to a dilatory reforming process
(it was planned in May) and a postponement of a land reform for the next
review, we do not rule out the possibility of a reduction of the tranche sum.
Real Sector
According to the Ukrstat, Gross Domestic Product (GDP) increased by
2.3% yoy in Q2 after 2.5% yoy growth in Q1. With respect to the previous
quarter, the economy posted a growth of 0.6% qoq. From the production side,
manufacturing (+4.2% yoy, but -1.1% qoq), construction (+28.8% yoy or
+7.8% qoq) and trade (+3.8% yoy or +2.6% qoq) were the major drivers of
growth, benefitting from improvements in business environment and living
standards. On the other hand, economic blockade in Donbas has hit the
mining industry and energy sector, where the decline was, respectively, 5.7%
yoy (-1.8% qoq) and 8.8% yoy (-2.6% qoq). Agricultural activity has posted a
decline by 2.9% yoy (-1.5% qoq). Expenditure-based approach shows
significant improvement in household consumption (from +2.8% yoy in Q1 to
+6.9% yoy, or +1.9% qoq) on the back of growth in wages and much less
volatile prices. The demand for capital investments also remains sanguine, in
comparison with the previous crisis years. Investments increased by 23.7% yoy
(+7.4% qoq). Exports fell by 2.1% yoy (-0.5% qoq) in real terms, while imports
surged by 4.6% yoy (but -6.3% qoq). Thus, the contribution of net exports to
GDP growth in Q2 was negative.
We keep our GDP forecast at a level of +1.5% yoy in 2017, but
see a possibility for a stronger GDP performance. For the second half of
2017, we expect that investments activity should cool down due to partially
satisfied demand for investments. For 2018, we still expect 3% yoy growth.
Industrial output dynamics improved well in August – from -2.6%Source: State Statistics Services, RBI/Raiffeisen RESEARCH
Contributions to GDP by expenditures (pp)
-15
-10
-5
0
5
10
15
Q2'16 Q3'16 Q4'16 Q1'17 Q2'17
Net exports Investments
Government consumption Household consumption
GDP, % yoy
Source: State Statistics Services, RBI/Raiffeisen RESEARCH
Contributions to GDP by sectors (pp)
-4
-2
0
2
4
6
Q2'16 Q3'16 Q4'16 Q1'17 Q2'17
Trade Manufacturing Construction
Mining Agriculture Energy
Others GDP, % yoy
* UKRAIN 7 3/4 09/01/27
Source: Bloomberg, RBI/Raiffeisen RESEARCH
10 year yield of Ukrainian Eurobond (%)*
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17

3. 3
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Ukraine
yoy in July to +1.2% yoy. In seasonally adjusted terms, industry showed an
increase by 2.2% mom. Mining industry plunged by 6.8% yoy, but if
compared to July, there was an improvement by 1.9% mom. Coal mining
dropped by 24.8% yoy, which, as stated, was caused by the economic
blockade of the Donbas (large coal mining region). Iron ores mining dropped
by 3.1% yoy and oil/gas extraction fell by 2.3% yoy. On the other hand,
manufacturing grew by 5.6% yoy (+2.6% mom). The leaders were chemical
industry (+33% yoy), machinery (+10.4% yoy) and food production (+6%
yoy). In contrast, coke production collapsed by 13.6% yoy because of the
deteriorating supply from the mining industry. In turn, deficit of coal resulted in
a decline in electricity production by thermal power plants. Thus, the energy
production fell by 2.8% yoy, but still performed better than in July, with an
improvement by +5.5% mom. In total, within January-August 2017, industrial
output fell by 0.4% yoy, while in the same period last year it grew by 2.5%
yoy.
Retail sales dynamics improved in August – from +6.6% yoy to
+9.7% yoy. As a result, we see 8.5% yoy growth in January-August 2017. In
our view, the pension reform may provide an additional boost to retail sales,
as soon as the first results of the reform would find their way to the consumers’
incomes.
Inflation
Seasonal decline in food prices resulted in a reduction of the Consumer Price
Index (CPI) by 0.1% mom in August. However, annualized inflation
growth rate accelerated a tad, from 15.9% yoy in July to 16.2%
yoy due to base effect, as consumer prices dropped by 0.3% mom in August
2016. For the first time in 12 months, food prices declined (-0.6% mom) owing
to a reduction in vegetable and fruit prices – by 21.5% mom and by 5.7%
mom respectively. On the other hand, egg prices jumped by 18% mom
because of a growing domestic market deficit (apparently, it was after the rise
in exports to Europe following the scandal with poisoned eggs there). Alcohol
and tobacco prices went up by 1.4% mom while prices for clothes fell by
2.4% mom on the back of seasonal sales and UAH revaluation. Communal
payments increased by 0.3% mom in August due to a hike in tariffs for water
supply (+1.7% mom), sewerage (+1.6% mom) and housing maintenance
(+0.7% mom). Costs of transport services grew by 1.4% mom owing to
increase in transportation fees by passenger road transport (+1.6% mom).
Given the consumer prices dynamics in recent months, we see significant risks
that the NBU target (8% +/-2 pp) could be missed this year. Thus, we
change our inflation forecast from 9.5% yoy to 11% yoy eop in
2017. At the same time, we still expect inflation deceleration to 6.5% yoy in
2018.
In August, producer prices went up by 0.4% mom. Mining industry was the
major driver of growth (+4.7% mom) – prices in coal mining boosted by 6%
mom, in iron ores mining by 6% mom and oil/gas extraction by 2.2% mom.
As a result, prices in coke production and metallurgy grew by 2.9% mom and
by 2.5% mom respectively. In addition, products of light industry became more
expensive – by 3.6% mom. Generally, prices in manufacturing went up by
1.2% mom. Meanwhile, energy sector demonstrated price reduction by 3.7%
mom due to lower tariffs for electricity (-4% mom). In August, growth of
producer price index (PPI) accelerated from 23.3% yoy to 23.6%
yoy.
*Figures in parentheses are weights in the CPI basket in 2017
Source: State Statistics Services, RBI/Raiffeisen RESEARCH
Contributions to CPI inflation* (pp)
-10
0
10
20
30
40
50
60
70
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Nov-17
Food and non-alcoholic beverages (42%) Alc./cig. (8%)
Energy/utilities (8%) Transport (12%)
Clothing (5%) Other components (25%)
CPI inflation (% yoy)
Source: State Statistics Services, RBI/Raiffeisen RESEARCH
Industrial output growth by sector (% yoy)
2.5
0.1
4.1
0.8
1.2
2.8
2.3
14.4
2.7
6.2
9.9
8.9
0.3
-0.4
-6.5
3.8
-5.9
4.8
7.0
3.3-17.1
5.6
1.1
6.4
-2.2
8.1
-20 -10 0 10 20
Industrial production
Mining
Manufacuring (all)
Utilities
of manufacturing:
Food
Light industry
Woodwork and paper
Coke, refined products
Chemical
Pharmaceutical products
Rubber, plastic and mineral…
Metallurgy
Machine building
Jan-Aug 2016 to Jan-Aug 2015 Jan-Aug 2017 to Jan-Aug 2016
Source: State Statistics Services, RBI/Raiffeisen RESEARCH
Inflation dynamics (% yoy)
-10
0
10
20
30
40
50
60
70
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
CPI Food prices PPI

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Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
Balance of Payments
The Current Account (C/A) deficit contracted from USD 597 mn in
July to USD 226 mn in August on the back of improving exports
dynamics. Growth of goods’ export (in current prices) accelerated from
9.3% yoy to 12.8% yoy. Food exports increased by 17.5% yoy (+11.2% yoy
in July) due to relatively high global prices and improved relations with some
trade partners. High global prices and increased production pushed
metallurgical exports up to 8.1% yoy (after +1.9% yoy previous month). By
contrast, merchandise imports dynamics deteriorated in August (from +22%
yoy to +10.4% yoy). Growth in imports of mineral products slowed down from
53.2% yoy to 32.7% yoy owing to the base effect – Ukraine intensified gas
purchases in August 2016. Given the lower demand, imports of machinery
products posted a 13.6% yoy growth in August, down from +28.6% yoy in
the previous month. Imports of chemical products showed deteriorated growth
dynamics too – from +16.7% yoy to +10.6% yoy. As a result, trade balance
of goods posted a deficit of USD 874 mn. On the other hand, trade balance
of services recorded a surplus of USD 309 mn (USD 181 mn in July) given
high gas transit.
Financial account showed a surplus of USD 743 mn in August
(USD 305 mn in July). FDI inflow accelerated from USD 137 mn to USD 194
mn, and the lion’s share of it was directed to the real sector. Foreign currency
outside the banking sector declined by USD 496 mn. Moreover, FX assets of
banking sector fell by USD 300 mn due to the placement of foreign currency
(FCY) government bonds in the domestic market. As a result, the Balance of
Payments (BoP) recorded a surplus of USD 518 mn.
In January-August 2017, the C/A deficit reached USD 2.1 bn which is USD
0.3 bn higher than in Jan-Aug 2016. Good’s export increased by 21% yoy,
and imports rose by 22.1% yoy. Meanwhile, the Financial Account collected
USD 3.4 bn. Thus, the BoP was reduced with a surplus of USD 1.3 bn in Jan-
Aug.
Monetary Policy and Exchange Rate
Step-by-step Ukrainian hryvnia loses its value on the back of
seasonal factor and deterioration of devaluation expectations. By
the end of September, USD/UAH rate crossed the level of 26.60. From time to
time, the regulator intervened the market in order to reduce volatility. Thus, the
National Bank of Ukraine (NBU) sold USD 96.6 mn at the auctions. Despite
the upward trending USD/UAH rate, we improved our forecast for the year-
end 2017 from 28.00 to 27.00 on the back of strengthening of Ukraine’s
financial stability after successful Eurobond release and restoration of FX
reserves.
Gross international reserves (GIR) reached the highest level since
the early 2014, of USD 18 bn. There were two major sources of reserves
replenishment in August. First, there were attracted USD 351.5 mn from the
placement of FCY domestic bonds. Second, the NBU bought USD 234 mn
from the market, in the frame of excess FCY supply. The major outflow was
due to debt payments of USD 498.8 mn (USD 448.7 mn to IMF). As we
expect the next IMF tranche to arrive before the end of 2017, we see the GIR
to have a boost to the level of USD 20 bn by the end of 2017.
The reduction of banking sector liquidity halted in September. In
late-September, about UAH 5 bn returned to the market, and significant share
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Balance of Payments (USD bn)
-2
-1
0
1
2
Aug-15
Oct-15
Dec-15
Feb-16
Apr-16
Jun-16
Aug-16
Oct-16
Dec-16
Feb-17
Apr-17
Jun-17
Aug-17Current Account Financial Account
Capital Account Balance of Payments
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Gross international reserves
2
4
6
8
10
12
14
16
18
20
-3,500
-3,000
-2,500
-2,000
-1,500
-1,000
-500
0
500
1,000
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
USD mn USD bn
NBU interventions/auctions Gross FX reserves, r.h.s.
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Official USD/UAH rate
23.00
23.50
24.00
24.50
25.00
25.50
26.00
26.50
27.00
27.50
28.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2016 2017

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Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
of liquidity moved from correspondent accounts to Certificate of Deposits
(CDs). As a result, the balances on correspondent accounts dropped to UAH
42-43 bn, while CDs grew to UAH 38-39 bn. The money market rates went
down on the back of stabilized UAH liquidity. Index of interbank rates
(overnight) declined by about 50 bp to 11%.
Growing risks for price stability forced the NBU to keep the key
policy rate at 12.5% on 14 September. According to the regulator,
inflation moves above the expected trajectory, and “the 2017 year-end
inflation is projected to deviate more significantly from the mid-point of the
target range (8% ± 2 pp for end-2017)”. The NBU sees the major risk for
price stability in hike of budget spending and pension payments. Growing
inflationary pressure may push the regulator to a tighter monetary policy and
raise its key policy rate, we think.
Banking Sector
UAH deposits declined in August owing to seasonal factor.
Household (PI) deposits in local currency (LCY) declined by 0.3% mom. UAH
deposits of corporate sector (CO) dropped by 2.8% mom on the back of
significant quarterly tax payments. By contrast, FCY savings went up in August
– business increased its deposit portfolio by 1.8% mom, households’ portfolio
went up by 0.6% mom.
LCY lending continued to recover. CO LCY loans hiked by 1.3% mom,
PI LCY loans increased by 4.1% mom. On the other hand, private individuals
reduced their FCY debt by 1.3% mom. CO FCY portfolio remained at the level
of July.
In Jan-Aug, banking sector showed positive financial result of
UAH 3.4 bn on the back of lower interest spending and provision costs. The
non-performing loans (NPL) ratio stays very high in – at 56.9% in August.
Government banks still has the worst loan portfolio – 71.6% of “bad” loans
(mainly due to Privatbank that has 86.3% NPL ratio). NPL of foreign banks
amounted to 47.1%, private Ukrainian banks – 25.6% (the latter occupy the
smallest market share of total banking sector assets – 12.5%).
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
CO loans indexes, Dec-13 = 100
0
20
40
60
80
100
120
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
LCY CO loans FCY CO loans
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
PI loans indexes, Dec-13 = 100
0
20
40
60
80
100
120
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Mar-17
Jun-17
LCY PI loans FCY PI loans

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7. 7
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
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8. 8
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
Acknowledgements
This report was prepared by Raiffeisen Bank Aval on 6 October 2017
Raiffeisen Bank Aval
9, Leskova Str., 01011 Kyiv, Ukraine
Tel. +380 44 490 8888
Fax +380 44 285 32 31
Call center: 0 800 500 500 (free within Ukraine)
www.aval.ua
Market Analysis
Sergii Drobot (+380 44 590 5621)
Treasury
Head: Vladimir Kravchenko (+380 44 4908808)
FX, MM: Yuriy Grinenko (+380 44 4908988), Olexandr Varenytsia (+380 44 4954227), Nikolay Vysotsky (+380 44
4954226)
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44 4954201)
Securities: Oleg Klimas (+380 44 4908939), Alexey Evdokimov (+380 44 4954206), Daria Shatskykh (+380 44 4954204)
Multinational Corporate Customers
Head: Andreas Kettlgruber (+380 44 4954110)
Relationship Managers: Anna Prydybailo (+380 44 2309981), Lesia Byba (+380 44 4954271)
Raiffeisen Bank International CEE Research Team
GLOBAL HEAD OF RESEARCH, RBI
Peter Brezinschek (1517, FA*)
HEAD OF ECONOMICS / FIXED INCOME
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Gunter Deuber (5707, FA*)
CEE MACRO, FX AND FIXED INCOME,
RBI VIENNA
Wolfgang Ernst (FX Strategist, 1500, FA*)
Stephan Imre (FI Strategist, 6757, FA*)
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CEE CREDIT COMPANY RESEARCH, RBI
VIENNA
Jörg Bayer (Head, 1909, FA*)
Martin Kutny (Corporates, 2013, FA*)
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RBI contacts: +43 1 71707 (+ extension);
[name].[surname]@rbinternational.com
*FA: Financial Analyst
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CENTRAL EUROPE (CE)
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