Euro 2012 investments, increased social spending and monetary micro-management have not sufficed to keep Ukraine from heading toward a recession, experts are warning. Falling commodity prices and an exceptionally poor business climate now have some predicting the nation may spend the second half of the year in the red, as 2013 gears up to be even tougher than its predecessor.
New numbers confirm what Ukrainians have felt for months already – the economy is at a standstill. Inflation is hovering around zero, salaries are stagnant and the only successful investments are those that have political backing. Once again Ukrainians are seeing their country succumb to the global crisis, with no growth expected this year, even as their biggest trade partners – Russia, Poland and Germany – continue to push forward.
Yet the receding tide is pushing down all boats. A recent International Monetary Fund report dispelled hopes of revival in 2013, lowering global gross domestic growth forecasts to 3.6 percent, slightly above this year’s 3.3 percent estimate, adding that risks of further slowdown were “alarmingly high.”
Aside from Europe’s never-ending debt woes, the main brake will likely be a cooling down of Asia, particularly China. This has already impacted commodity prices that are so critical to Ukraine – metallurgy dropped 12 percent in August, compared to last year, according to estimates by Austrian Erste Bank’s research unit in Ukraine.
As a result, both Erste Bank and Kyiv-based investment bank Dragon Capital have projected no growth for Ukraine this year, with both the third and fourth quarters forecast to be in the red. Both continue to forecast next year’s growth at 3 percent, albeit mostly from the second half of the year.
But poor policy has also contributed more than its share to Ukraine’s woes. Aside from the poor investment climate, a misguided policy of keeping the hryvnia-dollar exchange rate stable is threatening to derail the economy.
In order to keep this politically sensitive indicator stable, the central bank has splurged the nation’s international reserves – which fell from $38.2 billion last August to $29.3 in September this year. It also maintains a policy of keeping liquidity in the banking sector low, bankers say, notably by giving selective access to refinancing.
This is driving up the cost of credit, as is the fact that Ukrainians are pulling deposits or reducing their length. Companies looking to expand or service working capital needs now face devastating rates of 20-25 percent. Worse still, they cannot bet on inflation covering part of the costs.
Currency concerns have also hit consumer confidence, which fell by 4.8 points to 81.8 (100 is neutral) in September, according to a monthly GfK Ukraine survey. „Fluctuations in the dollar exchange rate in early autumn were likely to be the main factor behind the deterioration in consumer confidence,” reads the report.
Looking forward, the main question is whether a new parliament will be able to muster the will needed to revive talks with the IMF and push for a better gas deal with Russia. A new report by America’s Citigroup claims the deal with Russia will likely be postponed, with local elites unwilling to share natural resource rents – Ukraine’s northern neighbor has repeatedly made lower gas prices conditional on entering the Customs Union or joint control of state gas giant Naftogaz.
But a new lending program is possible, as long as Ukraine meets the key conditions of raising household heating and gas prices and letting the hryvnia fluctuat. Hope lies in the fact that the next government will have over two years before any further elections, experts note, and will thus be able to push through tough decisions.
Kyiv Post editor Jakub Parusinski can be reached at [email protected].
