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Morgan Stanley downgrades Ukraine's GDP growth estimate in 2021 to 3.4%
KYIV. Aug 30 (Interfax-Ukraine) – Analysts at Morgan Stanley have downgraded the estimate of Ukraine’s GDP growth in 2021 to 3.4% compared to 4.5%, as previously expected, and predict a 4.2% GDP growth in 2022, according to the materials available to Interfax-Ukraine.
The analysts continue to project consistent growth in the third and fourth quarters of 2021, fueled by a better harvest, continued domestic recovery as COVID-19 restrictions are lifted, and further recovery in external demand.
Morgan Stanley notes low vaccination rates compared to other countries among the risks to the forecast.
In addition, the analysts predict an increase in the National Bank’s key policy rate from the current 8% per annum to 8.5% during the next revision, which is to take place on September 9.
At the same time, they are changing the forecast for the fair value of VRI (value recovery instruments) following changes in expectations of economic growth in 2021-2022. In particular, with expectations of growth of 4.3% in 2021 and 3.8% in 2022, the fair value of these securities was estimated at 156% of par, while the postponed economic recovery, which is forecast for the next year, will lead to a decrease in the fair value to 151%.
Morgan Stanley expects Ukraine’s Finance Ministry to seek to buy additional VRI in the future, but this looks unlikely this year due to the high price and lack of funds given the delay in IMF funding.
VRI were issued as part of the restructuring of Ukraine’s public debt in 2015 instead of eurobonds for a nominal amount of about $3.2 billion (20% of the restructuring volume) and are not part of the country’s public debt. Payments under VRI will be made annually in cash in U.S. dollars, depending on the dynamics of real GDP growth in Ukraine in 2019-2038, but in two calendar years – that is, between 2021 and 2040.
If GDP growth for the year is below 3% or real GDP is less than $125.4 billion, then there will be no payments on securities. If the growth of real GDP is from 3% to 4%, the payment on securities will be 15% of the excess of the GDP indicator over 3%, and if it is above 4%, then another 40% of the excess of the GDP indicator over 4%. In addition, from 2021 to 2025, payments are capped at 1% of GDP.
As reported, the Ministry of Economy in July 2021 confirmed the forecast for GDP growth in 2021 by 4.1%. The National Bank expects GDP growth in 2021 to be 3.8%, in 2022-2023 – 4% each.
