Ukraine started the year officially in recession. Gross domestic product accelerated its fall in the fourth quarter, all but wiping out any progress from the first half of the year. With the elections over and steel prices low, experts predict the trend will continue for at least the next six months.
It became clear the economy was headed for a significant slowdown after third quarter numbers revealed GDP had fallen by 1.2 percent. The harvest was admittedly down a fifth compared to the previous record-breaking year but remained above the long-term average, and the country was riding high on electoral spending ahead of the October parliamentary vote.
So the 2.7 percent drop in the last three months of 2012 came as a surprise, falling considerably below the expected Bloomberg consensus of 1.8 percent. This brought the year-end result to a puny 0.2 percent, compared to 5.2 percent in 2011.
As a result prospects for 2013 are increasingly grim. In a report released Jan. 31, Kyiv-based investment bank Dragon Capital cut its forecast by half to 1.2 percent, with most of the growth to come from the second half of the year. They are not alone to feel the bearish mood.
In telling symbolism, the latest macro report by Erste Bank, titled “Ukrainian economy in 2013: no silver lining in sight,” added power to the punchline by warning this would be the last report and macro coverage of Ukraine is discontinued as of Feb. 1.
The reason: after five years operating in Ukraine, the Austrian bank is joining a growing group of firms that are packing their bags and heading home. On Dec. 20 last year the bank agreed to sell its only unit in the former Soviet Union for $83 million, booking a $200 million loss.
Troubles in the banking sector are certainly part of the problem. Lending is tight and rates have skyrocketed to over 20 percent in real terms – fueld by record low inflation and fear of devaluation – a huge burden on companies seeking to invest.
But industry isn’t doing so well either. Accounting for a quarter of GDP, industrial production fell by 7.4 percent in December, bringing the annual number down to 1.8 percent, according to Igor Zholonkivskyi at Erste Bank. Machine building registered a 6 percent decline in 2012, while oil and coke production fell by a staggering 26.4 percent.
Low external demand is one problem, with advanced markets still struggling and overproduction of steel in China. But outdated and inefficient production methods are also to blame.
“The pre-2007 golden era of Ukrainian steelmakers is history now,” Zholonkivskyi wrote, adding that steel production was down by since 2007 and prices have been falling since mid-2011. “Close to 26 percent of Ukrainian steel is produced using open-hearth furnaces. This production method is no longer used in any developed countries.”
An arguably bigger worry, in the short term, is consumption. By mending fences and playgrounds, among other handouts, prospective lawmakers helped drive retail sales up over 15 percent and consumption up some 8 percent. Further supporting the trend was the Euro 2012 football championship, hosted by four Ukrainian cities in June-July.
But there are no such spoils waiting in 2013, with Dragon Capital analysts predicting “private consumption will slow sharply this year.”
Meanwhile, higher debt redemptions will bear down on state coffers, presenting an additional risk. A lot of hopes are pinned on a new International Monetary Fund program, the purpose of the currently ongoing mission visit in Kyiv.
But yesterday’s announcement by Economy Minister Ihor Prasolov that Ukraine’s authorities do not expect to reach agreement on a new lending program after mission leaves on Feb. 12, confirmed forecasts that the authorities foot-dragging on meeting IMF lending criteria will hold funds back until the situation deteriorates further.
Kyiv Post editor Jakub Parusinski can be reached at [email protected]
