NBU Survey: Businesses Expect 10% Inflation in 2018 but Believe in Growth of Activity and Investment

Kyiv, October 12, 2017. Ukrainian businesses maintain cautious optimism while planning their activities for the next year. According to the quarterly survey of the National Bank of Ukraine (NBU), company executives expect inflation to remain at 10%, but at the same time forecast a revival in business activity and an increase in production volumes. Expectations regarding the inflow of foreign investment have been rising for the second consecutive quarter.

Inflation and Exchange Rate: Stability, But Not Without Risks

The survey, the results of which are published on the NBU website, shows that corporate inflation expectations remain stable. Businesses forecast consumer price growth over the next 12 months at 10%, which is practically unchanged compared to the Q2 estimate (9.9%). At the same time, the share of managers who expect inflation not to exceed 9% or to decrease is 40.1%.

The main factor for price growth, according to 73.1% of respondents, remains the increase in production costs. At the same time, panic sentiments regarding the hryvnia exchange rate have somewhat weakened. The share of businessmen who expect the dollar exchange rate not to exceed 27 hryvnias over the next 12 months increased from 14.8% to 21.1%.

Business Activity: Confident Growth in Expectations

The most encouraging are the forecasts regarding overall business activity. The business activity expectations index, calculated by the NBU, rose to 117.4% in Q3 (against 114.3% in the previous quarter). This is already the third consecutive quarter of growing optimism. Representatives of all types of activities, except construction, expect an economic revival in 2018.

• Optimism Leaders: processing industry (127.1%), transport and communications (122.9%), trade (120.2%).
• Regional Leaders: The highest expectations are among businesses in Lviv (144.3%) and Vinnytsia (131.1%) regions.

Enterprises also forecast an acceleration in the growth rate of production of goods and services over the next 12 months — up to 17.5%. Companies in the energy and water supply and trade sectors are particularly optimistic. As noted by RBC-Ukraine, the improvement in forecasts is based on expectations of increased investment spending, staff expansion, and maintaining high sales volume plans.

The main constraining factors for production growth, as before, are excessively high energy prices (44.9%) and raw material costs (43.4%), according to businesses.

Investments and Finance: Cautious Confidence

An important indicator is the growth in expectations for foreign investment inflow. The balance of responses on this indicator (the difference between the share of optimists and pessimists) increased to 18.1% compared to 10.3% in Q2. This is the second consecutive quarter of confident growth.

Executives also assess the current state of their companies positively — the response balance reached 7.2%, which is the highest in the last five quarters. Enterprises in the agro-sector, trade, and processing industry consider themselves the most successful.

At the same time, the demand for borrowed funds has slightly decreased, and the share of companies planning to take bank loans has remained stable (about 38.5%). Among them, 81.5% intend to raise financing in the national currency, indicating growing confidence in the hryvnia.

Context: Economic Recovery in 2017

Optimistic business expectations are supported by current macroeconomic trends. According to estimates by the Ministry of Economic Development and Trade, the growth of the composite production index (GDP) in Ukraine in January-June 2017 was 2.2%. Simultaneously, as previously reported, the population and businesses are increasing hryvnia deposits, and banks are expanding their loan portfolios in the national currency, indicating strengthening financial stability.

For foreign investors considering the Ukrainian market, this growing business optimism and trust in the hryvnia serve as important signals of an improving investment climate.

Analysis: What’s Behind the Numbers?

The results of the NBU survey paint a picture of a transition period:

1. Stabilization of the Macroenvironment: Inflation and exchange rate expectations, although remaining at a high level, no longer show panic. Businesses are learning to plan under conditions of predictability.
2. Internal Growth Driver: Optimism regarding business activity and production is based not on external shocks, but on the assessment of their own plans for investment and expansion.
3. Regional Inequality: The demand for growth is strongest in the western and central regions (Lviv, Vinnytsia oblasts), indicating different speeds of business adaptation in different parts of the country.
4. Structural Problems Persist: The high cost of energy and raw materials remains the main barrier to the competitiveness of Ukrainian goods.

These are just the main strokes, but they demonstrate the overall state of affairs, analysts and experts note.

Business Prepares for Growth but Awaits Support

The NBU survey clearly shows: Ukrainian business, having survived the most difficult years of the crisis, is gradually transitioning from a survival strategy to a development strategy. Executives believe in the possibility of growth in production volumes, investments, and business activity in 2018. This optimism, however, is cautious and depends on two key conditions.

First, on the ability of the state and the National Bank to ensure further macroeconomic stability — to control inflation and maintain predictability of exchange rate policy. Second, on progress in solving structural problems, the main one being unacceptably high energy prices for industry. If these conditions are met, the cautious optimism of business has every chance of turning into real economic growth in the coming year.