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The medium-term macroeconomic outlook across emerging Europe has improved considerably since the beginning of H209, when Central and Eastern Europe (CEE) was facing the worst macroeconomic crisis since the post-Soviet transition. Following a marked slowdown in real GDP growth for Ukraine in Q211, we revised down our forecast for 2011 to 4.0%, from 4.4% previously. A weakening global growth picture bodes badly for Ukraines export-dependent economy and a faltering domestic demand picture underpin our lower growth estimates for the rest of 2011. We forecast many of the economic imbalances to correct going into 2013, which should see GDP growth pick up to 4.7%. The recession subdued arrival numbers in 2009, dropping by 12% year-on-year (y-o-y), and as the majority of arrivals come from CEE, 2010s arrival numbers did not entirely rebound. For 2010 and 2011, BMI calculates that there was continued growth in tourist arrival numbers, with a jump from 21.9mn in 2009 to 23.3mn in 2010 and nearly 26.0mn in 2011. From 2012 to the end of our forecast period in 2015, we forecast the industry to return to and largely maintain double-digit growth until 2015, when it is then forecast to grow by 9% y-oy to 38.5mn tourist arrivals.

The majority of tourists arrive in Ukraine via road or rail. The country is well placed for land travel as it borders seven countries, including Russia. Transport via road is forecast to substantially outpace rail travel. This coincides with visa liberalisation between the EU and Ukraine – so EU citizens no longer require a visa to enter the country for stays of less than 180 days – and the fact that Ukraines rail connections with the rest of Europe and Asia are in need of development. Positively, in November 2009 a memorandum of intent was signed between then Slovakian transport minister Lubomir Vazny, Ukrainian Railways deputy director Micheal Kospjuk and Russian Railways president Vladimir Yakunin for the expansion and upgrading of the broad gauge line linking Ukraine and Slovakia. The line was originally built to transport Ukrainian iron ore to Slovakias steel works in Košice.

Ukraine is set to co-host the 2012 European football championship with Poland in June-July and the tournament will be a key driver for the countrys tourism industry during our forecast period. Not only will it bring thousands of tourists to the country, the requirements to be chosen as a host for the competition include an array of infrastructure investment that can only be regarded as positive for the industry. European footballs governing body, UEFA, said in February 2011 that it was satisfied with the progress made by the four cities in the Ukraine selected to host matches for the tournament. An internal dispute at the Ukraine Football Association had slowed progress on infrastructure and put its host position in jeopardy. The first match will take place in Poland but the final will take place in Ukraine.

Hungarian budget airline Wizz Air started offering services from Ukraine in 2008 and BMI expects the trend of low-cost carriers in the country will increase in the coming years. This would be a positive development as it would drive down fare prices, making travel within, to and from Ukraine more affordable, increasing tourism numbers. Wizz Airs entrance to the market has already prompted the largest Ukrainian carrier, Aerosvit, to reduce fares. Since March 2011, Wizz Air, Italys Wind Jet and Turkeys Pegasus Airlines all fly to Ukrainian cities. The authorities at Boryspil International Airport, which serves Kiev, are constructing another terminal for international and budget flights. Terminal D was completed winter 2011 but it requires another six months for commissioning. The new terminal will only serve football fans during Euro 2012.

The January 2010 presidential election, the countrys first since 2004s Orange Revolution, had the potential to destabilise the country politically but turned out better than expected, with political risk continuing to subside. President Viktor Yanukovych successfully formed a coalition government in March 2010 and it obtained a new US$15.2bn Stand-By Arrangement from the IMF (after the original loan was suspended in November 2009), which are all positive steps for stability. That said, the risk of a breakdown in the countrys IMF agreement is a distinct possibility, presaging a rockier path for the economy. Kiev has not received the last three scheduled tranches of loans under its US$15.2bn Stand-By Arrangement and although the parliamentary assembly did pass much delayed pension reforms in July 2011, we believe the risk of another tranche failing to be dispersed is high and we cannot rule out a formal abrogation of the whole agreement at this stage.