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Ukraine has the second largest sales market and one of the largest production capacities in the CEE region. It also has an autos industry which was hit exceptionally hard in the global financial crisis. It acts as a large contractor hub for Western European companies among others, serving as a source of labour that is much cheaper than traditional manufacturing bases. Ukraine is also far closer to core markets than China and other East Asian producer hubs. The domestic market is underpinned by strong car density growth, as per capita GDP rises and a greater number of the population can afford to drive.

Our GDP growth forecast for 2011 is 4.8% and we see 2012s headline figure slipping back to 4.1%, with GDP growth sitting between these two points for the rest of our forecast period. However, the 2012 figure is more likely to shrink than to grow, with Reuters reporting that the European Bank for Reconstruction and Development predicts GDP growth of 3.5% in 2012.

A significant portion of autos production has historically been for domestic consumption. However, when domestic sales slumped during the financial crisis, there was no uptake of the unwanted vehicles, as Western Europe was also experiencing a radical shift in purchasing. The result of this was an 83% y-o-y drop in production over the course of 2009, following a relative slowdown of 6% y-o-y growth in 2008.

To put this into context, the period 2002-2008 saw average growth of just over 71% a year in terms of completed units. 2010 saw growth of just under 20% for a total of 82,814 completed vehicles, and BMI sees overall growth of 31.4% by the end of 2011 for a total of 108,845 vehicles.

We also see growth in the industry remaining very close to double digits for the rest of the forecast period, with a 2016 production prediction of 177,630. This is significantly less than the 2008 figure of 424,127. This is, in part, due to our estimation of economic difficulties continuing in Western Europe and effecting domestic purchasing power, and also an undermining of the competitive cost advantages of the CEE region. Furthermore, demand in Western Europe is unlikely to return to previous levels in the short or even medium term. We see evidence of a structural shift in the industry, in which domestic firms are aiming to increase their exposure to export markets, and in particular, a tackling of the autos trade deficit.

This is seen in the development of exports, which we see reaching 13.23% of all production by the end of our forecast period. While we see the trade deficit growing from the 2012 figure of -112,111 to 154,590 in 2015, we view this as the peak, after which there will be the beginning of a return to an appropriate import/export balance.

BMI believes Ukraine has achieved a very well balanced compromise in the free trade agreement it signed with the EU in late 2011. According to the terms of the agreement, Ukraine grants EU carmakers tariff-free access to 20% of its total market each year, which should aid in the recovery of its new vehicle sales. In 2011, 48,000 EU cars could be imported tariff-free. We believe the import ceiling is crucial as it will help protect the domestic autos manufacturing segment from foreign competition.

For a market which has traditionally been very protective of its domestic manufacturing, and as recently as September 2011 raised import duties on vehicles from 10% to 25%, the development comes as welcome news. This is particularly significant given that Ukrainian consumers are increasingly favouring imported brands over domestic ones. Also, a recovery in the new vehicles market looks unlikely during our forecast period to 2016 as a combination of import controls and a loss of purchasing power (owing to high inflation and slow real wage growth) will dent vehicle demand in the market.