After overheating for the last few years, Ukraine’s economy is finally cooling down, analysts say
Contruction and building materials are among the several sectors of the economy already in decline, raising what could be false hopes for prospective homebuyers about a drop in real estate prices. Even if property prices fall, the cost of borrowing is going up.
Bad news is also coming from the food and metallurgical industries. Moreover, with exports on the verge of decline, and a currentaccount deficit surging, experts warn that the country’s currency could slide. There is even talk of a recession.
“The recession danger will only materialize if the National Bank of Ukraine continues pressuring the money supply after inflation gets back on track. If this measure is applied for too long, affecting consumer demand, it can cause significant industry decline,” said Hlib Vyshlinsky, Custom Research Director GfKUkraine market research firm.
The first cold shower for the economy came this spring, when the government and central bank scrambled to control spiraling inflation. The central bank tightened reserve fund requirements for commercial banks as a part of its antiinflation measures, and allowed the domestic currency to appreciate. Some experts defended the moves as desperate but needed attempts curb inflation, which reached 15 percent by midyear.
As a result of these measures, however, banks tightened up their crediting policies, and the cost of borrowing rose suddenly. This, in turn, dented costly longterm investment businesses. The volume of real estate construction projects, for example, inched down by 1.2 percent in the first half of this year.
With the onslaught of the worldwide credit squeeze and Ukrainespecific factors, “banks don’t want to give loans to either builders or real estate buyers,” said Serhiy Kostetskiy, from the marketing department of SV Development.
After a steady growth of the construction industry since the 1990s, big companies are complaining about low sales. Kyivmiskbud said investments have dropped by 30 percent this year. Prices for newlybuilt apartments in Kyiv are also declining, slightly thus far. Experts said prices could drop by some 10 percent this autumn – longawaited news for consumers. Yet the lower prices could be countered by rising borrowing ñosts.
Suppliers and producers of building materials say they are also feeling the pinch. According to a report in Korrespondent, a Russianlanguage sister publication of the Kyiv Post, the industry has incurred $2.2 billion in losses thus far this year. According to Ukrainian Business Resource portal, sales dropped by 40 percent in the summer months alone, compared to the same period last year. The shocking sale figures made some market players reconsider their longterm strategy. Among them are German producer of building materials Knauf, which has already invested 80 million Euros into production facilities in Ukraine.
“Unsold goods with millions of Euros are accumulating at our [Ukraine] warehouses … that’s why [Knauf] is canceling investment programs for the next two to three years,” Nicolaus Knauf, the company’s coowner said.
Ukraine’s food industry also declined 3 percent in both June and July compared to the same periods last year, which analysts said could be rooted in weak purchasing power and imports flooding the market.
“The import of goods and services increased threefold in the first six months of this year,” said Oleksandr Zholud, an economist at Kyiv’s International Center for Policy Studies.
By year’s end, the downward trend in the food industry may reverse due to an exceptionally good 43 million ton harvest this year. But other industries are also showing signs of decline.
The exportoriented metallurgical sector, Ukraine’s main foreign currency source, could be on the verge of the first steel price decline in recent years..
“This could be the beginning of a big decline and would be a big blow to Ukraine’s economy. Metallurgy accounts for more than 40 percent of Ukraine’s exports,” Zholud warned.
Falling steel prices coupled with a widening current account deficit, forecast at 9.3 percent of GDP, has economists predicting that Ukraine’s national currency could slide due to the pressures.
“In 2009, we doubt that the Ukrainian economy will once again benefit from a positive terms of trade shock, which in our view will translate into slower growth, greater financing difficulties and a weaker currency,” reads a July report by JPMorgan.
Some economists predict a growth and currency slide. ICPS has a cautious prediction. Ukraine’s GDP growth rate will finish off the year at 6.5 percent, almost one percent lower than last year.
“In recent years, the economy was overheated,” said Vyshlinsky. “We had extremely high growth rates for salaries and prices rising combined with the high economic growth.”
If the government pursues a calm and wise economic policy, fear of recession may turn out to be groundless.
“Our current economic situation thus far may be characterized as a rather soft landing,” he added.
