Highlights The government drafted a pension reform and introduced the bills to the Parliament. In its updated memorandum, the IMF is also demanding a land reform and additional measures against corruption. We think the next IMF tranche may be released after the summer break, likely in autumn 2017. Recent economic indicators point to better economic conditions: Q1 GDP has been slightly revised upwards to 2.5% yoy, and the May figures for industrial production (1.2% yoy) and retail sales (10.7% yoy) have been better than expected. Nevertheless, with cumulative industrial output down in the first five months of 2017, we lowered our GDP growth estimate for 2017 from 2% to 1.5% yoy. The inflation rate accelerated to 13.5 % yoy in May, due to higher food prices. Nevertheless, the National Bank may cut the key interest rate further by 50bp to 12% in order to support economic growth at its next meeting on Thursday, 6 July. FX reserves reached USD 17.6 bn in end-May, given a favourable situation on the FX market allowing for FX purchases. The exchange rate traded rather stable around USD/UAH 26. The NBU tweaked FX market regulation, simplifying investment abroad and FX forward transactions as well as introducing electronic FX transfer licenses for individuals.

1. 1
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
June 2017
Ukraine: Sovereign ratings
LCYrating S&P Moody's Fitch
Long-term B- Caa3 B-
Short-term B n.a. n.a.
Outlook Stable Stable Stable
FCYrating
Long-term B- Caa3 B-
Short-term B n.a. B
Outlook Stable Stable Stable
Latestreview Dec-16 Feb-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 2,808 3,110
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 0.5 4.4
CPI (avg, % yoy) -0.3 12.1 48.7 13.9 12.0 7.4
CPI (eop, % yoy) 0.5 24.9 43.3 12.4 9.5 6.0
PPI (eop, % yoy) 1.7 31.8 25.4 35.7 13.6 3.5
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 -4.1 -3.6
Goods export (% yoy) -8.3 -14.5 -29.9 -5.2 11.6 9.5
Goods import (% yoy) -5.8 -29.0 -32.6 4.4 11.8 3.6
FDI (USD bn) 4.1 0.3 3.0 3.4 1.5 3.0
Total external debt (% of GDP) 79.1 95.7 131.7 121.7 114.5 108.8
Gross FX reserves (USD bn) 20.4 7.5 13.3 15.5 20.0 22.0
MonetarySector
USD/UAH (eop) 8.24 15.82 24.03 27.10 28.00 28.50
FiscalSector
Central state deficit (% of GDP) -4.4 -4.9 -2.3 -3.0 -3.2 -2.7
Public debt (% of GDP) 40.7 52.9 72.6 76.1 72.8 65.3
Source: State Statistics Service, National Bank of Ukraine, Ministry of Finance, RBI/Raiffeisen RESEARCH
Financial Analysts
Sergii Drobot, Raiffeisen Bank Aval, Kyiv
Ukraine Economist
+380 44 5905621
sergii.drobot@aval.ua
Editor:
Andreas Schwabe, CFA, RBI Vienna
Senior Economist CEE
+43 1 71707 1389
andreas.schwabe@rbinternational.com
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.
Highlights
 The government drafted a pension reform and introduced the bills to the
Parliament. In its updated memorandum, the IMF is also demanding a land
reform and additional measures against corruption. We think the next IMF
tranche may be released after the summer break, likely in autumn 2017.
 Recent economic indicators point to better economic conditions: Q1 GDP has
been slightly revised upwards to 2.5% yoy, and the May figures for industrial
production (1.2% yoy) and retail sales (10.7% yoy) have been better than
expected. Nevertheless, with cumulative industrial output down in the first five
months of 2017, we lowered our GDP growth estimate for 2017 from 2% to
1.5% yoy.
 The inflation rate accelerated to 13.5 % yoy in May, due to higher food prices.
Nevertheless, the National Bank may cut the key interest rate further by 50bp to
12% in order to support economic growth at its next meeting on Thursday, 6
July.
 FX reserves reached USD 17.6 bn in end-May, given a favourable situation on
the FX market allowing for FX purchases. The exchange rate traded rather stable
around USD/UAH 26.
 The NBU tweaked FX market regulation, simplifying investment abroad and FX
forward transactions as well as introducing electronic FX transfer licenses for
individuals.

2. 2
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
Economic Policy
On 22 June, the Cabinet of Ministers introduced a number of
laws regarding the pension reform to the Parliament. The long-run
goal of a new pension system is to reduce the pension fund’s significant
deficit. According to the draft, the key changes include:
 An increase in minimum pension from 1 October 2017 by about 5%;
 The pension age will be replaced by a minimum seniority that will be
gradually increased from 25 years to 35 years in 2028;
 All pensions will be calculated based on an average wage indicator
(initially set for this year at UAH 3,764, i.e. around USD 145 in
equivalent);
 Pensions will be indexed annually adjusting the average wage indicator
by the growth of consumer prices (50% weight) and average wage
increase (50% weight) during the previous year;
 It is also planned to develop a cumulative pension program (consisting of
market based individual accumulation of pensions as well as a
government fund) by 2019 for those who are younger than 35.
Approval of the changes in the pension system will mark as a significant step
towards receiving next IMF tranche of USD 1.9 bn. Nevertheless, taking into
account the social sensitivity of this reform, we do not rule out further delays
and changes, as the government cannot rely on a strong majority in the
Parliament on the issue. Moreover, the land reform, also required by the IMF is
still pending.
Real Sector
The State Statistics Service of Ukraine improved its preliminary
estimate of GDP growth by 0.1pp to 2.5% yoy in Q1 2017.
Seasonally adjusted, Q1 growth was unchanged in the negative territory at -
0.3% qoq after a stellar growth rate in Q4 2016. The agriculture sector, after
an increase of 18.4% yoy in Q4 2016, posted a decline of 0.7% yoy (-3.5%
qoq). Contribution of the mining industry to GDP growth was negative (-7.5%
yoy or -4.4% qoq) owing to the events in Donbas (escalation of conflict and
economic blockade). Moreover, the energy sector suffered by 2.9% yoy (-
0.1% qoq). The major contributors to economic growth in Q1 were
construction (+21.3% yoy or +7.1% qoq), manufacturing (+3.2% yoy or
+0.4% qoq), and trade (+3.1% yoy or +0.4% qoq).
Final consumption improved in Q1 2017 – from -0.1% yoy in Q4
2016 to +3% yoy (+2% qoq). The positive wage dynamics allowed
household consumption to increase by 2.8% yoy (+2.2% qoq). Government
expenditures also increased by 4.2% yoy (+1.5% qoq). Furthermore, there
were positive investment dynamics on the back of modernization and
renovation of equipment by enterprises. Gross fixed capital formation rushed
to +20.1% yoy, in comparison to the previous quarter there was a decline by
5.2% qoq. The net export’s contribution to GDP growth was negative. Exports
dropped by 0.4% yoy (-4.9% qoq), while imports went up by 2.9% yoy (-0.6%
qoq).
Considering all the negative factors (decline in production in previous months
and growth in energy imports) caused by the economic blockade of Donbas,
we lowered our GDP growth estimate for 2017 by 0.5pp to
+1.5% yoy. Nevertheless, we still hope for stronger economic growth up to
3% for next year.Source: State Statistics Service, RBI/Raiffeisen RESEARCH
GDP growth by expenditures (% yoy)
16.1
-3.7
23.9
2.0
4.7
2.3
19.6
9.7
27.1
-2.2
0.9
4.8
2.9
-0.4
20.1
4.2
2.8
2.5
-10 0 10 20 30
Import
Export
Gross fixed investment
Gov-t consumption
Private consumption
GDP growth rate
1Q17 4Q16 3Q16
Source: State Statistics Service, RBI/Raiffeisen RESEARCH
GDP growth by sector (% yoy)
4.8
18.4
-0.7
2.7
0.2
15.6
1.9
3.2
-1.9
1.4
11.8
2.5
-0.7
-7.5
3.2
-4.5
21.3
3.1
4.7
-2.8
-6.8
-0.3
-10 -5 0 5 10 15 20 25
GDP growth rate
Agriculture
Mining
Manufacturing
Utilities
Construction
Trade
Transport
Education
Healthcare
Finance
4Q16 1Q17
Source: Pension Fund, RBI/Raiffeisen RESEARCH
Deficit of pension fund (% of GDP)
0%
1%
2%
3%
4%
5%
6%
7%
2013 2014 2015 2016 2017e

3. 3
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
In May, industrial production dynamics reversed – after a 6.1%
yoy decline in April, it posted a 1.2% growth. The seasonally
adjusted index grew by 1.6% mom. Manufacturing went up by 6.1% yoy
(+0.6% mom) owing to improvement in machinery (+14.7% yoy), light industry
(+14.4% yoy) and food production (+7.7% yoy). By contrast, coke production
and metallurgy plunged by 20.6% yoy and 8% yoy respectively owing to a
decline in mining industry by 4.6% yoy (however there was growth by 4.1%
mom in seasonally adjusted terms). Given the adverse events in the Donbas
region, coal mining and iron ores mining dropped by 4.3% yoy and 9.8%
yoy correspondingly. There was also a recession in the energy sector (-9.6%
yoy). In Jan-May, industrial production decreased by 1.3% yoy.
Retail sales in May showed a strong performance, growing by
10.7% compared to the previous year and 5.6% compared to the previous
month. Cumulatively, for the first 5 months in 2017, sales rose by 6.9% yoy.
Looking at our own seasonal adjustment, retail sales made a strong 10% jump
from April to May – while this may overstate the development and/or be of a
temporary nature, it underlines the generally positive tendency in domestic
demand after the sharp decline of 2013-2015.
Inflation
In May, consumer prices increased by 1.3% mom on the back of
higher food prices. As a result, inflation accelerated to 13.5% yoy from
12.2% yoy in April. Growth in food prices amounted to 2.3% mom. Prices for
vegetables and fruits surged by 16.7% mom and 12.8% mom respectively due
to a decline in supply caused by adverse weather conditions. By contrast, egg
prices plunged by 13.4% mom on the back of oversupply due to partial
restrictions on export of poultry products. Prices for alcohol and tobacco
continue to grow – by 2.7% mom in May or +8.5% ytd. Meanwhile, prices for
clothes dropped by 1% mom owing to seasonal factors. Given the increase in
tariffs for water supply (+8%), sewerage (+5.3%) and buildings maintenance
(+4.4%), communal payments went up by 0.8% mom. Prices for fuel and oil
increased by 0.9% mom in May.
Growth of producer prices sharply decelerated in May – from
35.6% yoy to 27.1% yoy. In mom terms, PPI dropped by 1.3% mom due
to the reduction of prices in iron ores production by 22% mom (which is linked
to global price dynamics). Generally, prices in mining industry contracted by
9.8% in May compared to April. By contrast, in manufacturing production the
prices went up by 0.5% mom on the back of more expensive food prices.
There was a decline in prices by 2.1% mom in the energy sector, which was
associated with the reduction of electricity tariffs.
Balance of Payments
In April, the Current Account (C/A) deficit amounted to USD 146
mn that is an improvement compared to the previous month (deficit of USD
732 mn) when the government paid an interest on restructured Eurobonds.
However, compared to April 2016 (there was a surplus of USD 164 mn), the
situation deteriorated dramatically. Goods’ export growth rate sharply
decelerated – from 38.2% yoy to 7.5% yoy. Mainly it was due to deterioration
of food exports dynamics – from +49.3% yoy in March to +15% yoy.
Economic blockade of the significant share of the Donbas region, and as a
result a decline in metallurgy, resulted in metallurgical exports contraction by
7.1% yoy (after a growth by 36.8% yoy in March). Meanwhile, merchandise
Source: State Statistics Service, RBI/Raiffeisen RESEARCH
Inflation (% 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
CPI Food prices PPI
Source: State Statistics Service, RBI/Raiffeisen RESEARCH
Industrial output growth by sector (% yoy)
3.8
2.4
5.7
-0.6
1.8
4.6
1.1
21.9
-1.3
8.2
9.6
11.7
3.2
-1.3
7.4
2.6
-5.0
5.2
7.4
2.8
-21.0
-4.1
-3.5
7.4
-3.6
5.6
-30 -20 -10 0 10 20 30
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-May 2016 to Jan-May 2015 Jan-May 2017 to Jan-May 2016
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Balance of Payments (USD bn)
-2
-1
0
1
2
Current Account Financial Account
Capital Account Balance of Payments

4. 4
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
imports demonstrated a significant slowdown as well – from 31.6% yoy in
March to 13.4% yoy in April. Imports of machinery goods increased by
19.7% yoy in April, but compared to March, the growth decelerated (from
50.9% yoy). Mineral products import jumped by 62.2% yoy (+101.8% yoy in
March), that was due to a growth of natural gas purchase and an increase in
coal imports due to the deficit in the domestic market.
The fourth IMF tranche (USD 1 bn) and the second EU instalment (EUR 600
mn) helped to reach a financial account surplus of USD 1.1 bn in April. In the
meantime, FDI inflow was relatively low – only USD 43 mn. Foreign currency
(FCY) outside the banking sector fell by USD 266 mn.
In Jan-Apr, the C/A deficit amounted to USD 1.31 bn, which is quite
close to the last year figure – deficit of USD 1.327 bn in Jan-Apr 2016.
Goods’ export grew by 28% yoy, while imports increased by 22.4% yoy.
Considerable support of foreign partners helped to accumulate USD 1.7 bn on
the financial account. Hence, the balance of payments reported a surplus of
USD 0.4 bn in Jan-Apr.
Monetary Policy and Exchange Rate
By the end of June, the FX market reached equilibrium, and
USD/UAH oscillated close to 26.00. The NBU held four FX auctions and
managed to buy USD 163.9 mn from the market. Interestingly, all auctions
took place in the first half of June, indicating that the market was balanced in
the second half of the month.
In May, international reserves went up by USD 0.4 bn to USD
17.6 bn. A favourable situation in which the FX market helped the National
Bank to buy USD 521.2 mn from the market (USD 266 mn using intervention
in the form of a request for a better exchange rate). In addition, the
international reserves received USD 38.1 mn from the placement of domestic
bonds denominated in FCY and EUR 8 mn from the European Commission. To
repay and service state debt the government has spent USD 230.4 mn.
The NBU made a number of minor updates to the FX market
regime:
 Investment abroad was simplified. A limit for businesses to invest abroad
increased from USD 50,000 to USD 2 mn per year. If the volume was
below USD 50,000, then the license might be obtained by a simplified
procedure.
 Electronic FCY licenses for Ukrainians were introduced (effective after 3
July). Private individuals are able to get an e-license for transferring FCY
abroad. The limit for such operations is USD 50,000 per year.
 Banks’ FX operations have been loosened. Forward FX transactions were
simplified – limitations on the group of the Classifier of Foreign
Currencies and Investment Metals were cancelled, as well as the
maximum maturity period of forward transaction (up to 365 days
before). Also banks were allowed to perform interbank and international
market transactions involving the purchase or sale of investment metals
under the “tod”, “tom”, “spot”, “forward” or “swap” terms for any
foreign currency listed in the Classifier. Finally, the regulator removed
the restrictions on cashless FX transactions for individuals other than
entrepreneurs.
Banking sector liquidity is still high. Owing to the NBU FX auctions, liquidity
almost reached UAH 120 bn. However, by the end-June it shrank to UAH
106bn. After the key policy rate cut in late-May, the index of interbank rates
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
USD/UAH official 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
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Gross international reserves
0
2
4
6
8
10
12
14
16
18
-3,500
-3,000
-2,500
-2,000
-1,500
-1,000
-500
0
500
1,000
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
USD mn USD bn
NBU interventions/auctions Gross FX reserves, r.h.s.
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Goods' export and import growth rates (% yoy)
-60
-40
-20
0
20
40
60
Export (% yoy) Import (% yoy)

5. 5
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
(overnight) has slightly decreased, and has now oscillated around 11%.
The next Monetary Committee Meeting is scheduled on 6 July. Taking into
account the stable FX rate, the regulator may cut the key rate by
another 50bp to 12% in order to support economic growth.
Banking Sector
Deposit dynamics were virtually flat in May. Private individuals’ (PI)
deposits decreased by 0.3% mom in LCY and by 0.1% mom in FCY. Deposits
of corporations (CO) in UAH increased by 0.1% mom, but went down by
0.1% mom in USD.
We saw a certain revival of PI lending in May on the back of a
decline in interest rates and growth of wages, respectively. Furthermore, PI
LCY loans increased by 1.7% mom (+4.8% yoy). PI FCY have continued to
decline – by 1.5% mom. However, the credit activity in the CO segment was
rather sluggish. Apparently, the companies whom banks are willing to lend
have their own resources now. CO LCY loans shrank by 0.5% mom, while
FCY portfolio increased by 0.2% mom.
Source: National Bank of Ukraine, RBI/Raiffeisen RESEARCH
Money market
0%
5%
10%
15%
20%
25%
Jan-16
Feb-16
Mar-16
Apr-16
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
Apr-17
May-17
Jun-17
0
25
50
75
100
125
150
175
UAH bn
CDs
Balances on correspondent accounts
Index of interbank rates (overnight ), r.h.s.
Key policy rate, r.h.s.

6. 6
Pleasenotetherisknotificationsandexplanationsattheendofthisdocument
Ukraine
Risk notifications and explanations
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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 4 July 2017
Raiffeisen Bank Aval
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