OREANDA-NEWS. November 29, 2007. The deceleration of GDP growth from 7% this year to 5.5% in Ukraine next year will be mainly due to worsening external conjuncture (i.e. gas price hike and possible decline in world steel prices); at the same time, strong domestic demand (household consumption and investment) would be the main factor driving economic growth in 2008, Dimitry Sologoub, Raiffeisen Bank Aval analyst, believes.

According to a Raiffeisen Bank Aval forecast, Consumer Price Index will grow by 9% in year-over-year terms in 2008, which is lower than current inflation projection for this year (14.5%), but much higher than inflation levels in developed countries (not more than 3-4%). Inflation will remain high in 2008 due to inherited inflationary pressures — high PPI growth, rapid money supply and credit growth, and disequilibrium in food markets.

Expected terms of trade loss will lead to further widening of current account deficit next year — up to 5.5% of GDP, which is much higher than this year (3% of GDP). At the same time, high capital inflows (in form of FDI and foreign borrowings) will fully cover rising trade balance deficit.

In the opinion of Dimitry Sologoub, Ukraine's accession to WTO, expected in nearest future, will not have much effect on macroeconomic indicators in 2008.

The question of exchange rate regime in 2008 remains open for now. Recently NBU officials have made some signals on the possibility of introducing greater exchange rate flexibility in near future. In opinion of Raiffeisen Bank Aval analyst, sustainable economic growth and strong capital inflows have created necessary preconditions for shifting to more flexible exchange rate regime and gradual transition to inflation targeting that will allow to reduce inflation in a few years to the level of 5-6%.

The perspectives of fiscal policy are in shadow at the moment, since new government is likely to change significantly draft budget for 2008. "Despite populistic promises made by politicians before elections, high and accelerating inflation will constrain sharp increase in social spending next year," Dimitry Sologoub said.

Finally, according to the Raiffeisen Bank Aval's analyst, ongoing political turbulences are not likely to significantly affect economic growth in 2008.