Debt crisis may yet affect Ukraine.
Ukraine is bracing for a possible repeat of the economic crisis of 2008-2009, experts say, pointing to fears of another global downturn in coming months.
Global equity markets rallied on Aug. 9 after the U.S. Federal Reserve pledged to preserve interest rates at close to zero until 2013, but confidence remains weak.
Markets have plunged on fears that worldwide economic growth was stagnating on the heels of debt crises in the U.S. and European Union.
Confidence in global growth was further rattled this month after credit rating agency Standard & Poors downgraded the US, the world’s largest economy. Fears and talk about a possible double-dip recession are spreading.
If it happens, Ukraine, one of the world’s hardest hit economies during the 2009 recession with a 15 percent plunge in gross domestic product, could get hit hard yet again.
Many world stock markets have in recent months dropped about halfway towards 2008-2009 levels. Ukraine’s small and relatively illiquid stock market crashed in the past week by more than 20 percent.
Alexander Valchyshen, head of research at Kyiv-based Investment Capital Ukraine, said he expected a downturn, but probably less severe than that experienced in 2009.
“There will be a downturn, but not as abrupt as in 2008,” Valchyshen said, holding out the hope for slight growth in gross domestic product this year.
Kyiv’s economy remains heavily vulnerable to external shocks. Ranked as one of the world’s top 10 steel-exporting nations, its economy depends on world demand for steel.
The global situation and Ukraine’s place in it is “very worrying,” according to Tim Ash, head of emerging market research in London at the Royal Bank of Scotland.
“We are in an aggressive risk-off environment, with investors taking all risk off the table.” Fortunately, he said, Ukraine’s position is better than in 2008-2009, citing $37 billion in central bank reserves and improved budget revenues.
“But the impact on Ukraine will be felt through the real economy, such as trade. The clear risk is that we see metals prices easing back which will impact heavily on Ukraine,” Ash added.
Ukraine’s currency tumbled by nearly 50 percent in early 2008 and its public finances suffered heavily during the 2009 recession. Financial collapse was prevented with billions of dollars in loans from the International Monetary Fund.
Timothy Ash from the Royal Bank of Scotland
The fund froze additional loans this year after President Viktor Yanukovych’s administration failed to deliver on austerity measures, namely bringing up household utility prices to market levels and increasing the retirement age, now set at a 55 for women and 60 for men.
Ash said Ukraine will need to renew cooperation with the IMF.
“The Ukrainian government needs to make sure it works to bring the IMF program back on track, to get some cash in the bank to put it in a better position to manage through what looks set to be a much more challenging global environment,” Ash said.
Andriy Nesteruk, head of research at investment bank Jaspen Capital, said troubles could show as early as the fourth quarter of this year, if world steel prices drop while Russia hikes the price of Ukraine’s natural gas imports.
Ukraine is a small and open economy that can’t, itself, affect the global situation. Rather, it needs to adapt to it. – Ihor Burakovsky, a Kyiv-based economist.
Nesteruk said such a scenario could swell the nation’s current account deficit, as imports rise while exports fall, putting pressure on the domestic currency.
“Ukraine is a small and open economy that can’t, itself, affect the global situation,” said Ihor Burakovsky, a Kyiv-based economist. “Rather, it needs to adapt to it.”
Economists have long urged Ukraine to lift bureaucratic barriers to stimulate growth, particularly of small-to-medium-sized businesses.
“I would also argue that on the political front it is hardly helpful that the government is taking legal action against former Prime Minister Yulia Tymoshenko,” Ash said, noting that her conviction would not be “viewed positively by investors.”
Since independence in 1991, Ukraine has attracted only $50 billion in foreign direct investment, compared to the $200 billion that has poured into neighboring Poland, which has 10 million less people.
Kyiv Post staff writer Kateryna Panova can be reached at [email protected]
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