Ukraine’s economy, one of the world’s worst hit by the global economic crisis, is showing signs of slowly rebounding from last year’s 15 percent drop in gross domestic product.
Ukraine’s economy, one of the world’s worst hit by the global economic crisis, is showing signs of slowly rebounding from last year’s 15 percent drop in gross domestic product.“March’s batch of economic data has been encouraging,” said VTB Capital analyst Oleksandra Evtifyeva. “Industrial output surged 13.8 percent on the year, fueled by an 18.2 percent on the year hike in manufacturing.”
Another analyst, Maryan Zablotskyy, analyst at Erste Bank Ukraine, is also upbeat. “The economic stabilization that we witnessed earlier is now turning into economic growth,” Zablotsky said. “In March, almost all industries – those oriented to both domestic and external demand – witnessed strong growth,” albeit from a low base.
But little of this growth is being credited to the country’s governing coalition led by President Viktor Yanukovych.
Instead, analysts say, Ukraine should be thanking the Chinese government for the monster stimulus package that the world’s largest country launched last year. As a result, blistering growth rates of the resource-hungry Chinese economy hardly faltered last year, marking 8.7 percent gross domestic product growth in 2009, followed by 11.9 percent year-on-year growth in the first quarter of 2010.
Chinese demand is swallowing up vast quantities of metals and iron ore, Ukraine’s key exports, which constitute up to 40 percent of total exports. As a consequence, Ukraine’s exports are returning to pre-crisis volumes. Steel output surged by 28 percent in March, in comparison to February, with export prices up 20 percent since the start of the year. Iron ore export prices were up 148 percent on the year in April.
With Ukraine’s metallurgical sector a tightly-linked production chain, ranging from smelting to the mining and processing of iron ore and coking coal, an export spike is felt all down the line, right into the workforce’s pay.
Ukraine’s ongoing sensitivity to global commodity markets, the nation’s bane in 2009, could be a boon in 2010. Real wages have grown 5.7 percent in the first quarter of 2010, driven by export industries, according to Erste Bank.
Consumer sentiment has turned. While consumer lending is still non-existent, keeping car and property markets depressed, consumer goods are looking up.
Most notably, the mobile phone market has rebounded from its 50 percent collapse in 2009. In the first quarter of 2010, it grew by 48.8 percent on the year in units sold, according to retailer Unitrade Group. Other sales chains, such as Mobilochka, have put first quarter growth at 75-80 percent over 2010. Consumer confidence is also surging, according to pollsters GfK Ukraine.
While industry grows on the back of China, the resulting hard currency revenues have stabilized and even strengthened the hryvnia, now trading at just fewer than 8 hryvnias to the dollar.
In addition to the China factor, the end of gridlocked government with Yanukovych’s election on Feb. 7 has also helped restore confidence. The government showed it could deliver results by finally passing a 2010 budget with a deficit of 5.4 percent of gross domestic product, within the limits set by the International Monetary Fund. This will boost the chances of future disbursement of IMF funds.
Government domestic debt has proved attractive to foreigners, and the population is slowly returning money to banks. The central bank is no longer battling devaluation, but rather is on guard against the opposite: a currency that appreciates too swiftly. It has increased its reserves by purchasing more than $800 million since mid-February.
All of these positive developments are reflected in a surge in business confidence, according to the central bank’s business confidence index.
“The majority of businesses now say that they plan to invest in their production volumes and hire new workers. Representatives of all major industries expect their output to increase during the next 12 months,” Erste’s Zablotskyy said.
“The greatest optimism is seen in the mining, electricity and construction industries.”
Inventories are low after a year of destocking, and, with an upswing on the horizon, companies are planning to start replenishment.
Two further growth drivers will kick in later in the year. Firstly, a 30 percent cut in the prices of natural gas imported from Russia will insulate energy-hungry Ukraine from future shocks as China drives global energy prices higher.
“We estimate that a $100 discount per billion cubic meters will help Ukraine save up to $2.1 billion, 1.6 percent of gross domestic product, in 2010,” Evtifyeva said.
Secondly, bank lending could restart by the second half of the year.
“Industries are still suffering from the ongoing credit freeze, which limits the growth potential,” said Zablotskyy. “However, banks, flooded with liquidity, are left with little choice other than to renew lending. This should support economic growth later this year.”
According to Vitaly Strukov, executive director of investment bank Concorde Capital, banks have already re-launched lending to industry. “Already now it is possible for companies to get loans at 10-12 percent annual interest rates in dollars, for 3-5 years,” he added.
All this is helping forecasts for 2010 growth. The IMF upgraded Ukraine’s projected GDP on April 21, from 2.7 percent to 3.7 percent, a figure also adopted by the government. Investment banks such as Astrum and Dragon Capital are even more optimistic, putting the figure at 4-5 percent.
Bumpy road still ahead
Trouble signs remain on the horizon, however. “Growth is currently export-dependent and thus unstable,” said Oleg Ustenko, executive director of SigmaBleyzer, an equity management firm.
That means that if China goes through its own bubble-and-bust cycle, the economies of Ukraine and many other nations could be dragged down with it.
Amid the favorable signs, Ustenko is worried that the government will not act quickly to make overdue free-market reforms. “Our greatest fear is that, due to the improvement of external factors and the lowering of the gas price, there is a colossal risk that the government might postpone carrying out reforms,” Ustenko said.
Yanukovych announced on May 15 that the government’s economic reform program would be finalized by June 2. The administration has pledged to slash red tape, boost capital investment, launch welfare reform and create a transparent land market.
Skeptics remain
“All that is happening is the imitation of reform,” said Oleksandr Paskhaver, president of the Institute of Economic Development. “The government is trying to carry out reforms in a purely bureaucratic style. No real reform can result from that. No one is taking responsibility for these reforms, and no financing has been provided for them.”
The “most worrying thing,” according to Paskhaver, “is that the government simply does not seem to understand the difference between imitation and reality.”
Paskhaver, along with economist Anders Aslund, a senior fellow at the Washington, D.C.-based Peterson Institute for International Economics, have drawn up a list of urgent reforms needed to create sustainable growth. Among them are economic diversification to reduce reliance on exported commodities and the strengthening of the middle class. Also needed: less bureaucracy, modern commercial legislation, a law on public information, an association agreement with the European Union and the legalization of private sales of agricultural land.
Most importantly, Paskhaver argued, corruption needs to be rooted out. “If the government tries to launch, for instance, pension reform, before it reforms the system of state purchases and tenders, the population will not accept this,” he said.
Kyiv Post staff writer Graham Stack may be reached at [email protected].
