Wednesday 29 June 2016

United Arab Emirates, Ukraine, Uruguay and Venezuela Country Risk Report Q3 2016; New Report Launched

United Arab Emirates, Ukraine, Uruguay and Venezuela Country Risk Report Q3 2016

Lower oil prices will hit growth as government spending and consumer confidence falls. We forecast real GDP growth at 2.4% and 2.6% in 2016 and 2017 from an estimated 4.0% in 2015 Dubai will see an even sharper slowdown as discretionary spending from the rest of the Gulf, as well as the impact of weaker currencies in China and India, takes its toll on investment ad spending.

Credit growth to the private sector will remain relatively slow through, 2016 as commercial banks continue to increase provisioning against, potential loan losses due to the debt funding cliff.


Economic recovery in Ukraine will be sluggish in the years ahead. The country is stepping out of a prolonged period of economic contraction, having experienced two fully fledged economic crises in the last seven years.

It is unlikely that the Ukrainian government will retake control of Crimea and Sevastopol, nor the occupied parts of the Donetsk and Luhansk regions.

Ukraine will only meet part of the major structural reforms that are required by the IMF through its financing package. The Ukrainian authorities have already removed most of the gas subsidies and also implemented pension reforms. However, fighting endemic corruption, reforming the judiciary, and improving the banking sector and the business environment will take a slow pace.

Despite the new IMF package, Ukraine's FX reserves remain poor. FX reserve levels will also remain under pressure in the long term, as imports will outpace exports again in 2016 and beyond.

Russian President Vladimir Putin will be happy with Crimea for now, and will not push for annexation in the North East of Ukraine. Ethnic divisions in NE Ukraine not nearly as clear cut as Crimea, and it would benefit Putin to retain a large ethnic Russian influence in mainland Ukraine (enabling him to maintain a direct political stake in Ukrainian affairs). Moreover, Russia's shift of its attention to Syria will benefit Ukraine, whilst both Moscow and Kiev have urgent economic needs to end the fighting in eastern Ukraine.

Major Forecast Changes
The newly formed Groysman government will facilitate structural reform progress and enhance cooperation with the IMF.


Uruguay is set to experience a period of structurally lower growth in the coming years as investment into expanding agricultural production and re-export capacity is tempered and foreign capital flows fall. Nonetheless, Uruguay will continue to outpace Latin America's average real GDP expansion as the country's middle class supports private consumption growth.

Inflation will remain elevated over the coming years as the Banco Central del Uruguay will not implement significant policy measures to stymie price increases. The bank will instead focus on attempts to spur growth and encourage consumption with low borrowing costs as tempered investment weighs on economic growth.

There will be significant headwinds to the country's balance of payments as Argentines begin to repatriate assets stored in Uruguayan banks and Chinese demand growth for agricultural goods is tempered over the coming years as compared to the previous decade. This will have a negative impact on both the current and financial accounts. It will also lead to a continued depreciation of the Uruguayan peso.

Key Forecast Changes
Our outlook on the country's external position has improved substantially, as imports have contracted sharply in recent months and exports are set to strengthen in 2017.

We now expect the Uruguayan peso to trade higher in the coming quarters, in light of the bottoming of commodities prices and strengthening investor sentiment toward emerging markets.


Low oil prices, high inflation and a poor business environment will see Venezuela's recession stretch into its third year in 2016, and persist until 2018.

Major political gains on the part of the opposition in December's legislative elections will result in a gradual turn towards more orthodox economic policy, although the pace of change will be substantially hampered by the institutional strength of the PSUV and the power of the executive branch.

Political risk will remain elevated due to deteriorating living standards and lack of confidence in leadership to competently govern. Inflation will remain elevated, at the highest level in Latin America, and the operating environment will remain very precarious for foreign multinationals in the country.

Major Forecast Changes
  • Due to increased political gridlock which has diminished the probability of meaningful and timely economic reform, we have downgraded our real GDP growth forecasts for 2016 and 2017.
  • We forecast the economy to contract by 7.0% in 2016 and by 1.6% in 2017.
  • Following our Oil & Gas team's upgrade to oil prices, we believe that Venezuela's current account shortfall will be slightly narrower than we previously forecast, although still very wide by historical and regional standards, at 7.1% of GDP in 2016.

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