Dragon Capital improved macroeconomic forecast

According to NV.ua Dragon Capital improved its forecast on the drop in Ukraine’s GDP from -7,2% to – 5,5% in 2020.

According to Tomas Fiala, CEO of Dragon Capital, earlier they expected that the global economy would bounce back to a pre-crisis level in 2022, at its best in the fourth quarter of 2021. Today they suppose that the global economy will reach a pre-crisis level by the third or fourth quarter of 2021. The economy of the USA will recover as soon as the second quarter of the upcoming year. As for the Ukrainian economy, the company’s economist changed the forecast for the positive for this and upcoming year.

Fiala adds that the world experiences the so-called V-shaped recovery of the economy. One of the reasons is “very positive external background” – Central Banks of the USA, European Union, Japan, and China have undertaken a quantitative easing of the monetary policy. Quantitative easing was unprecedented and helped the world economy to recover faster.

The money supply in the USA increases by 20% during the last year. The US Federal Reserve System has bought out state government bonds four times as much as during the crisis 12 years ago, says CEO of Dragon Capital.
Also, expectations on interest rates helped the economic revival. There is a reason to believe that during the nearest four-five years they will remain as low as today.

“It means that money will cost nothing for developed countries. Hence, it has a positive impact on the prices for commodities which Ukraine exports”, explains Fiala.

He adds that metal, ore, and grain rallied very fast and remain on “highly positive levels for Ukraine”. As a result, there is a surplus current account of the balance of payment in Ukraine for the first time in the last few years (at the level of 3% from GDP).

Internal demand revived in Ukraine fast as well. The retail sales during July-August increased by over 8%, during the last eight months of 2020 by 6%.

According to the latest report of Dragon Capital, the Ukrainian economy, after a moderate decline in the 2nd quarter of 2020, is undergoing recovery faster than expected.

“Due to the nationwide lockdown and decline of the external demand in the 2nd quarter, the real GDP decreased by 9,9%. In the meantime, the economy of the EU shrank by 12% quarter to quarter. Compared to the last year, the real GDP reduced by 11,4% year to year. But in July, the pace of the decline of the Ukrainian economy slowed down by – 4,4% y/y. At the same time, many industries, in particular, manufacturing, retail, and cargo traffic, returned to the pre-crisis level, dated February 2020. Such faster than expected recovery of the economy is caused by two factors. First of all, the quick recovery of the external demand had a positive influence on export-oriented industries of Ukraine, such as the metal industry. This allowed steelworks built out volumes of production to the level of the beginning of the year, after a decrease in March-April. Secondly, the incomes of the population suffered from quarantine restrictions less than we expected. It let the retail and other sectors oriented on internal demand to grow”, explains Elena Belan, chief economist of Dragon Capital.

The updated forecast of the company supposed that in the context of the current spread of COVID-19, the pace of economic recovery would slow down during the upcoming months. At the same time, in the 4th quarter, there will be a slight decline in economic activity. Despite the increasing incidence rate, they believe it is unlikely the government announces the strict nationwide lockdown. The government will likely keep adaptive quarantine trying to mitigate its negative impact on the economy.

“Our basic macroeconomic scenario supposes that the Ukrainian government will make efforts to have IMF tranche by the end of the year. But still, there is a high risk this scenario will not become a reality”, says Belan.

According to the company, current-price GDP in 2020 will reach $146 billion; in 2021 – $155 billion. Inflation in 2020 will remain within the target zone of the National Bank of Ukraine (4-6%) and will be 4,7%, while in 2021 – 6,8%. They forecast that official currency exchange by the end of 2020 will be 29 UAH/$, while by the end of 2021 – by 30UAH/$.


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