Figures show that foreign investment has continued to flow into the country despite lasting political turmoil
The National Bank of Ukraine reported this month that foreign direct investment stood at $1.2 billion in the first quarter of the year, exceeding the bank’s provisional FDI estimates by more than $200 million.
Figures show that foreign investment has continued to flow into the country despite lasting political turmoil, an indication that investors have tuned out what they increasingly view as inconsequential political noise.
While investment inflows continue to rise, Ukraine still lags very far behind its EU neighbors.
In total, foreign companies have invested $24.4 billion in Ukraine since independence. But per capita FDI amounts to $524 so far this year, according to Kyiv-based investment bank Dragon Capital. For comparison, Poland’s reported FDI per capita for 2006 stood at $2,800, while Hungary’s was $6,700 last year.
The financial sector, real estate and construction attracted most of the FDI in the first three months of the year, with the Netherlands and Austria leading the way.
“We specifically note that FDI over the period remained strong despite no large merger and acquisition deals, which previously accounted for a significant share of direct investment inflow. This is a sign of broadening investor interest,” according to analysts at Dragon. The investment bank forecasts that net FDI will top $6 billion this year.
The current year is set to become an outstanding one for Ukraine’s economy in terms of investment activity. Fixed capital investments are breaking records as the country’s GDP and industrial growth rates continue to grow.
Inflation is expected to decelerate closer to year-end, although redistribution of funds in favor of households before the upcoming parliamentary election is likely to create additional inflationary pressure in the latter half of the year.
“Enjoying strong foreign demand, industrial enterprises increased output by 12.5 percent year-on-year in the first four months of 2007, supporting real GDP growth at a healthy 7.9 percent year-on-year,” according to Dragon.
Nerves of steel
Ukraine, ranked as one of the world’s top six steel exporters, is blessed with large deposits of raw material – coal and ore – required for producing this prized commodity. The country’s economic growth spurt first commenced in 1999, thanks largely to strong steel exports.
While world demand and prices remain high, strong steel exports are not the primary factor driving the country’s economic performance, according to Viktor Lysytskyy, who worked in the National Bank and Cabinet of Ministers when Ukraine, under the leadership of then Prime Minister Viktor Yushchenko, currently president, rebounded from years of economic collapse.
In a recent article on the Ekonomichna Pravda website, Lysytskyy argued that rising domestic consumption and the banking sector – not metallurgy – is now the engine driving the economy.
“Today, the nation’s growing prosperity is primarily generated by the keen cooperation between banks, employers and Ukrainian citizens [banking clients]. Our socio-economic successes depend little on increasing world prices for metal,” Lysytskyy said in the article.
Lysytskyy pointed out that for all of 2006, Ukraine’s banks issued Hr 530 billion (just over $100 million) in loans, while loans in the first five months of 2007 amounted to Hr 295 billion ($59 billion) – a 73 percent increase over the same period in 2006.
“Household consumption, which accounts for almost 60 percent of Ukraine’s GDP, remained the main growth driver despite slowing to 14 percent year-on-year from 21 percent in 2005,” according to Dragon.
According to Lysytskyy, metallurgy and the metals processing industry account for slightly more than 5 percent of GDP. Trade, agriculture, transport and the food industry sectors all contribute more to the country’s wealth.
