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Wednesday, October 21, 2009

Ukraine's Problems Show No Sign Of Abating

Despite the fact the Ukraine administration is resplendent with confidence that the International Monetary Fund is going to release the next $3.4 billion payment under the country's $16.4 billion lending program with the Fund, things are not so clear. In fact the International Monetary Fund only this week warned Ukraine (25 October) that they might freeze assistance ahead of the forthcoming presidential election if proposals to make populist wage and pension increases move forward.

In a statement issued after talks with Kiev’s officials, the IMF said its decision to go ahead with the next $3.8bn in aid would hang on “assurances that the wage and pension law approved by Ukraine’s parliament, which is at odds with the objectives of the authorities’ programme, will be vetoed”. The statement was a clear and explicit warning to President Viktor Yushchenko, who has not yet clarified whether he will sign or veto the law.

Still the Ukraine authorities are giving the impression that everything in the garden is rosy, or at least this is the impression Economy Minister Bohdan Danylyshyn is attempting to send out to the world.

“The payment will help sustain the economy and, to a certain extent, help cover the budget deficit,” Danylyshyn said last week in an interview at Ukraine’s New York Consulate. “It’s a pretty complicated situation in Ukraine, that’s why we expect a budget deficit this year and next.”
In fact he couldn't have put it better, the situation in Ukraine is pretty complicated, it really is. But behind the scences things don't seem to be anything like as clear as Danylyshyn is suggesting, and there is plenty of evidence of fund frustration with the administration and of a growing determination to tighten the screw somewhat. So is Ukraine assuming that, not being Latvia, they are too big too fail? And if they are doing so, are they right in their assessment, and if they are not, what might be the final outcome here.

Certainly Ukraine, for its part is now completely dependent on the IMF loan program - from which it has so far received $10.6 billion - to keep itself afloat following the impact of the credit crunch on the internal lending and construction boom and the fall in external demand for the raw material exports, and especially steel, on which it has allowed itself to become so dependent.

One thing which strikes the external observer immediately is the differential treatment Ukraine has been receiving when compared with other East European borrowers like Hungary and Latvia, since unlike the latter two the pressure on the administration to make swinging budget cuts has been fairly muted up to now. In fact the country did meet its end of May fiscal target, but since that time the underlying fiscal situation has worsened considerably. The general government deficit was 1.8 percent of GDP during the first five months of 2009, against an agreed program ceiling of 2.4 percent of GDP. However, according to the IMF this positive outcome largely reflects an increase in VAT refund arrears and advanced tax payments by large enterprises (0.5 percent of GDP).

At end-June, the government deficit stood at 3 percent of GDP, while expansionary fiscal measures are increasingly coming under consideration ahead of next years elections. The government has adopted a moratorium on tax audits and considered a tax amnesty, while parliament adopted modifications to the budget code implying additional transfers to local governments (which could exceed 1 percent of GDP in 2010). A draft law including large increases in public wages and pensions (2 percent of GDP in 2009, and 4 percent of GDP in 2010) has even been suggested by the opposition.

Not unsurprisingly an IMF team is now hard at work in Kiev, trying to assess whether Ukraine still meets the agreed terms of the loan prior to a final decision on the next payment.

And again, not everyone is in agreement that things are going as planned. Ukraine is at “serious risk” of veering off track ahead of the coming country review in November, according to a Fitch Ratings statement of October 14.

Fitch argue that Prime Minister Yulia Timoshenko's government has “abandoned” commitments made under the IMF's second review of the loan program, and the clearest evidence of this abandonment is the evident failure to increase prices for natural gas paid by households and utilities despite the massive subsidies the government is finding itself forced to pay.

In fact JuliaTimoshenko reiterated only last week there will be no increase in natural gas rates this year. Yet low gas prices simply add to the country’s budget deficit, which the IMF estimate will finally total 8.6 percent of gross domestic product this year, and that is excluding bank restructuring costs. Fitch themselves forecast a deficit of 8.5 percent of GDP, rising to 11.1 percent once the deficit of Nak Naftogaz Ukrainy is added in.

Danylyshyn for his part is much more optimistic, suggesting the deficit this year may fall to 6 percent, and then shrink to around 3.8 percent in 2010.

Naturally the IMF remain unconvinced by Danylyshyn's forecast, and argue that the outlook for public finances has worsened significantly, and that revised 2009 GDP growth projection implies that, without offsetting measures, the general government deficit is set to increase from 4 to 6.5 percent of GDP in 2009, to which needs to be added an anticipated extra 2.7 percent of GDP for Naftogaz which would send the total public sector deficit (inclusive of Naftogaz’ deficit but still excluding bank restructuring costs) up to 9.2 percent of GDP.

Ukraine’s economy is currently struggling to recover from an extremely severe recession which lead GDP fall by an annual 17.8 percent in the second quarter of this year, following a 20.3 percent decline in Q1. GDP may decline as much as 14 percent over the year as a whole (and grow 2.7 percent next year) according to the October IMF forecast, with everything really depending on the average prices of, and demand for, ferrous metals, which are Ukraine’s major export.

In line with the general outlook for the entire CEE region, anything in the way of vigorous recovery is not expected before the second half of 2010, and even then in many cases the vigour may be quite muted. If Ukraine's economy is to return to growth improvements in competitiveness (following the recent real exchange rate depreciation), a recovery of global steel prices, and increased public and private sector investment in infrastructure and energy projects with a clear external orientation will be the main drivers of the recovery.

Obviously all are agreed that a return of foreign investment to stimulate export activity is the key to recovery, and Danylyshyn expects Ukraine to receive $20 billion in foreign direct investment between next year and 2012 to help it diversify the economy away from exports of raw materials, such as steel and grains, and modernize existing facilities.

But again, at least in the short term, things are not so easy, given that while the current account has adjusted, net capital outflows continue to present an important source of balance of payment pressures.

In the first 8 months of 2009, the current account deficit amounted to USD 1.1 billion, USD 7 billion lower than a year ago. At the same time, external debt roll-over for banks and corporates was 76%, resulting in USD 7.1 billion net outflow over the same period. Additionally, ‘domestic capital outflows’ – flight to foreign cash by residents – drained out USD 5.7 billion. The recent IMF’s SDR quota allocation and the Special Borrowing Arrangement have helped to ease what otherwise would have been a major drop of forex reserves. The marginal weakening of the external accounts over the summer, higher demand for forex from corporates and households, on the back of heightened depreciation expectations have placed pressure on the currency since end-July. The depreciation trend also resulted in the leakage of Hryvnia deposits from the banking sector of around 7% during Q3. And indeed multiple exchange rates have once more reappeared following the return to selective National Bank of Ukraine forex interventions.

A Large Output Gap Remains

The economic contraction may have slowed, but a large output gap continues to exist. Industrial output was in fact up 1.9 percent month-on-month in September, with production resuming its upward trend following a 0.9 percent monthly fall in August. Steel output however continued to decline, raising more doubts about where the recovery is headed.

Industrial output fell 18.4 percent in September year-on-year and was down 28.4 percent between January and September when compared with the same period in 2008. Output in the steel sector fell 7.1 percent month-on-month after falling 0.3 percent in August. Year-on-year, it fell 14.9 percent in September. Steel production between January and September fell 36.9 percent against 39.0 percent in the January-August period and 41.2 percent in January-July.

The Industry Ministry forecast that raw steel production will fall to about 30 million tonnes this year from 37 million in 2008 and 42.8 million in 2007.

Economic activity plunged in the last months of 2008 and has continued to fall since. Real GDP fell 20.3 percent year-on-year in the first quarter of 2009, reflecting the deterioration of the global environment and further exacerbated by Ukraine’s pre-existing vulnerabilities. As in many other countries in the region, the recession was led by a drop in export volumes, followed by a very sharp contraction of domestic demand.

The pace of decline in private consumption was broadly unchanged in the second quarter at 11.6 percent year on year, while fixed investments sank by 57.8 percent. The contribution of net exports to growth became larger as real imports declined even faster (-53.5% y/y) than exports (-32.3% y/y). Output indicators point to stronger performance in Q3. In particular, as we have seen industrial production has started to recover gradually in recent months.

Ukraine's economy is following a typical boom/bust scenario, and following several years of evident overheating characterised by ever more rampant inflation the global crisis final brought the inevitable to pass. The IMF now expect real GDP to decline by 14 percent in 2009, against the 8 percent they expected at the time of their first programme review earlier this year. The downward revision reflects the larger than expected contraction in the first quarter of 2009. Given the pronounced recession in Ukraine’s main trading partners and the likely frail global demand for steel in the coming quarters, the forecast assumes only a very timid recovery in the second half of 2009, followed by a return to GDP growth in 2010, and there are, of course, evident downside risks to this scenario.

Beyond the export and industrial shock output has also been contracting fast in both the construction sector and in retail trade, reflecting the sharp impact of the credit crunch. Price adjusted retail sales were down 22% year on year in September, while construction activity has fallen by over 50% from 2008 levels.

Inflation The Large Fly In The Ointment

One of Ukraine's greatest headaches in recent years - as can be seen in the chart below - has been the high level of domestically produced inflation, and the total incapacity of fiscal and monetary policy to get to grips with this. Price pressures are, however, now easing fast in Ukraine as the output gap has its impact, and headline CPI inflation has now fallen to around 15 percent year-on-year, down from 22.3 percent in January. Inflation is expected to continue to decline, reflecting the massive excess capacity. However, base effects from the second half of 2008 will slow the decline in headline inflation, which the IMF expect to be still at 14 percent by end-2009.

Ukraine’s inflation rate is, however, still the highest in Europe, and even rose 0.8% month on month in September. This latest rise followed a 0.2% mom decrease in August. Annual inflation did however decelerate from 15.3% in August to 15.0% in September. The most significant contributor to this slowdown has been the slow rate of utility price increases, and this is a clear bone of contention with the IMF as the government refuses to change gas prices significantly given the scale of the recession and the looming elections. For the rest of the year, most observers expect inflationary pressures to remain muted, with annual inflation remaining around its current level of 15%.

The producer price index was however up by a monthly 3.6% in September, notably more than the 1.8% monthly increase registered in August, giving the highest monthly increase since July 2008. As a result the annual PPI turned positive again (up 1.6%) following a 3.7% year on year fall in August. So despite all the pressures inflation is proving extraordinarily resilient and continues to present a major problem for economic management.

Monetary Policy Caught in a Trap

All of which causes significant problems for the operation of monetary policy. The central bank realises the issue - and central bank Governor Volodymyr Stelmakh this summer described double figure interest rates as "far too high" (especially for an economy with a 14% annual contraction) - and has now cut its key discount rate twice since June to the current level of 10.25 percent. The bank justified the cuts by stating that price pressures have “eased” since inflation peaked at 31.1 percent last May, but on the other hand it is evident that inflation is still way to high. But the central bank is under continuous pressure from the government who want the central bank to lower rates further to make loans cheaper.

On the other hand, while base money has picked up significantly, largely on account of the government’s conversion of its share of the second IMF disbursement into hryvnia, broad money growth has continued to be weak, reflecting both a strong liquidity preference on the part of banks, and weak credit demand from consumers and companies.

Ukraine's exchange rate has depreciated by about 35 percent in effective terms (allowing for inflation) since early September 2008 and has been stable in recent months, allowing the NBU to scale back interventions since March 2009. More recently, since late June, however, moderate exchange rate pressures have reemerged.

The Ukraine banking system remains under strain, but deposits have stabilized, signaling some return of confidence. Non performing loans have increased since the onset of the crisis, but many banks are now reporting ongoing restructuring of their credit portfolios. After loosing some 20 percent of deposits between October 2008 and April 2009, aggregate deposits have stabilized in recent months, allowing the authorities to lift the ban on the early withdrawal of time deposits. The stabilization at the aggregate level conceals significant differences between banks, with the recently recapitalized state and foreign owned banks generally gaining deposits, while the domestic banks continue to experience significant outflows. Domestic currency lending has been picking up recently but this is almost entirely on account of lending by the state banks while other banks continue to reduce their credit portfolios.

As we can see, lending to households peaked at the end of last year, and continues to fall.

Household exposure to forex lending is significant in Ukraine, in this case the exposure is to dollars.

Closing Current Account Deficit Pressures Domestic Demand

As has been said, there has been a sharp fall in Ukraine exports since the crsisi began - 32.3% year on year in the second quarter. Q2 exports were up slightly from the first quarter, but nonetheless they remained at a very low level.

At the same time Ukraine's current account has continued to adjust, registering a small surplus in April-May. Import volumes declined sharply due to contraction of domestic demand offsetting the decline in exports due to continued weak external demand, especially for steel.

As a result of the drop in imports the goods trade deficit has been steadily falling towards zero.

As we can see in the chart below, a significant part of the current account adjustment has been due to the fact that imports have been falling significantly faster than exports.

The current account has continued to adjust, registering a small surplus in April-May. Import volumes declined sharply due to contraction of domestic demand offsetting the decline in exports due to continued weak external demand, especially for steel. The financial account has shown signs of stabilization, despite a sharp decline in FDI. External debt rollover rates for the first five months of the year held up well (about 70 percent for banks and 100 percent for corporations). In addition, outflows of foreign exchange from the banking system have receded in recent months.

The IMF expect the current account balance to swing into a small surplus in 2009 (0.5 percent of GDP). However the drop in both import and export volumes is expected to be larger than previously expected owing to the weaker domestic and external outlook. Lower FDI is broadly offset by lower net outflows of bonds and loans. The take the view that their program remains adequately financed, but they still see risks. Total financing requirements in 2009 are projected to amount to $41 billion, while total financing sources (excluding Fund resources but including $2.3 billion in prospective official financing) amount to $31 billion, leaving a financing need of about $10 billion, which could be fully met by Fund resources. Risks include lower-than expected official financing, renewed foreign currency cash outflows from the banking system, and reduced FDI inflows and rollover rates. If these risks materialize, the IMF suggest the use of reserves buffers and/or additional policy adjustment would be needed.

Ukraine's Looming Demographic Destiny

Ukraine has a serious demographic problem, raising longer term growth issues, and difficulties for the sustainability of public finance. Ukraine's population has fallen back from 51.5 million in 1989 to the current 46 million level. And, of course, the decline continues.

Behind the fall in Ukraine population lie two factors, very low fertility and the out migration of the younger population in search of better employment opportunities and higher living standards elsewhere. Ukraine's total fertility rate hit a low of 1.083 (according to the US Census Bureau) in 2001, and has subsequently rebounded to around 1.252 in 2008, in any event still well below the critical 2.1 tfr population replacement rate.

The “transition” in transition countries refers, of course, to the political and economic passage of these formerly communist, centrally planned states. But there is an equally profound demographic transition in progress: very low fertility levels and ongoing emigration virtually guarantees that these economies will age more rapidly than any other region. By 2025 more than one Bulgarian in five will be over the age of 65 -- up from just 13 percent in 1990. And while countries in other parts of the world are also aging at a phenomenal pace – think Japan, Korea, Germany and Italy -- no other region faces the challenge of building a modern, highly productive economy even as the portion of the population eligible for retirement explodes.

The dramatic declines in fertility in the teeth of post-1990 uncertainty are frequently interpreted as a temporary reaction to the uncertainties of economic and political transition. Yet, while there was a slight blip up in the prosperous years of the post-2000 boom, these economies seem to be past the point of demographic return: fertility would have to increase by more than one-third just to replace the existing population.

Ukraine suffers from a chronic problem of low fertility. A strong uptick in births had been noted in 2008 (see chart above), but the impact of the crisis is now evident, and the rate of increase in live births has now fallen back sharply.
Add a caption

Since the proximate cause of the crisis was to be found in global financial turmoil, it was perhaps only natural that the financial sectors of the countries most dependent on the international flow of funds would be hit first and hardest. In the autumn of 2008, as financial difficulties in the advanced economies led to a decline in global liquidity and a flight from risk, investors begin to differentiate among emerging markets. Ukraine’s high external debt and inflation levels led to a stampede for the exits in mid-October.

Ukraine's biggest single problem is still the persistent high levels of inflation which the economy produces. Given the application of coherent monetary policy the inflation problem could steadily work its way out of the system, but this is a big "if" given the known political risk factors. Inflation is currently projected by the IMF to hit single digits in 2010 and to remain in the 5–7 percent range thereafter.

The current account balance is now likely to remain at financeable levels, and the financial account deficit should narrow as capital inflows recover. Any recovery would be delayed, however, if there were an unexpected further decline in steel prices or another round of stress in global financial markets. On the other hand, a faster global recovery and a return of political stability after the January election could result in a more pronounced rebound of the economy. External and public debt remain sustainable in principal but doubts continue going forward especially in the context of financing constraints.

While Ukraine’s low level of public debt - 20 percent of GDP in 2008 - provides room for letting automatic stabilizers cushion the downturn and absorb part of the bank restructuring costs, fiscal sustainability would increasingly become a concern under unchanged policies, especially if the recession turned out more protracted than currently envisaged. Failure to implement the agreed measures in 2010 (pension-, tax-, and gas sector reform) or new expansionary measures could potentially jeopardize public debt sustainability in the longer run, and this is really what is preoccupying the IMF at the present time. The IMF baseline external scenario shows a rapidly declining external debt ratio but further deterioration in global economic and financial conditions, adverse current account developments, further shortfalls in FDI, or exchange rate overshooting would all negatively affect debt dynamics and create significant problems.

Not an easy picture, but then I guess no one ever thought it was.

Saturday, June 20, 2009

Facebook Links

Quietly clicking my way through Bloomberg last Sunday afternoon, I came across this:

Facebook Members Register Names at 550 a Second

Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.

Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name.

Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:

Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.
Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.

In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.

So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.

Monday, May 25, 2009

Horrid Outlook in Ukraine

By Claus Vistesen: Copenhagen

Not to beat a dead horse or anything, but it seems that Krugman, via Edward, was right after all. This does indeed seem to be a great depression if there ever was one.

(from Bloomberg)

Ukraine’s economy probably shrank as much as 23 percent in the first quarter of the year as the global financial crisis took its toll on the eastern European nation, President Viktor Yushchenko said. “The economic contraction is expected between 20 percent to 23 percent in the first three months of the year,” said Yushchenko today, according to a statement posted on his Web site. “The pace of the decline is one of the fastest in Europe.”

Yushchenko urged the government to review the state budget for this year, which still assumes the economy will expand 0.4 percent, according to the statement. A global recession is compounding problems in eastern European economies, which are being battered by a lack of credit, weakening currencies and plunging demand for their products. Ukraine was forced to turn to the International Monetary Fund with other emerging-market countries, including Hungary and Latvia, to boost its financial system in November.

Ukraine’s economy shrank 8 percent in the fourth quarter, the first contraction since 1999. The state statistics committee is expected to release gross domestic product figures for the first quarter in late June.

Of course, we need confirmation and I would not be surprised if the number reported by the government turned out to be wrong (in either direction!), but the the initial shot across the bow suggests a veritable collapse.

Wednesday, April 15, 2009

Ukraine Industry Continues Its Decline In March

Ukrainian industrial production dropped by more than 30 percent for the third month in a row in March, with output falling an annual 30.4 percent, the eighth consecutive month of year on yeardecline, following a 31.6 percent drop in February.

Steel production fell 43.1 percent in March from the same month a year ago, while machine building was down 53 percent and chemical output dropped 29.8 percent. These three industries form the core of Ukraine’s key exports, which constitute some 56 percent of the country’s gross domestic product.

There were, however, some tentative signs of slight recovery, since month on month, production was up 8.3 percent, following a 5.4 percent increase in February, led by food and chemicals, according to the statistics office. Over the whole fisrt quarter output fell 31.9 percent compared with the same period a year ago.

Monday, April 6, 2009

Ukraine Economy Contracts 8% In Q4 2008

Ukraine's gross domestic product fell year on year by 8% in the fourth quarter of 2008, following growth at of 6.4% in the third quarter, the State Statistics Committee said on Monday. The statistics committee also published revised data for earlier quarters showing GDP grew by 6.3% in the first quarter, and 6.2% in the second.

According to the latest data, the output in the construction sector fell by 32.4% in the fourth quarter, financial activities by 30.2%, the recycling industry by 23.9%, the extracting industry by 18.7%, trade by 15.6%, the production and distribution of electricity, gas and water by 14.3%, and transport and communications by 3.9%.

In fact the general GDP contraction would have been much worse if it had not been for the good showing of the agricultural sector, which grew by 23.5% due the record harvest.

The Statistics Committee also confirmed a 2.1% increase in real GDP in 2008, compared to 7.9% in 2007. The Ukraine government initially forecast last year's GDP growth at 6.8%, but lowered its forecast to 1.8-2.5% towards the end of the year.

This year, the Ukraine Council of Ministers expects a slowdown in Ukraine economic growth to 0.4%, while economists generally expect a decline of around 5-10%. The government has now stopped providing monthly GDP estimates, so the first detailed GDP statistics we will see for this year will only be released in late May.

Update: March Inflation and Revised World Bank Forecast

Ukraine’s inflation rate, the highest in Europe, fell for a seventh month in March as real wages fell, weakening domestic demand. The annual inflation rate declined to 18.1 percent, from 20.9 percent in the previous month. Month on month, prices rose 1.4 percent, after a 1.5 percent gain in February. Producer prices, often regarded as an early indicator of consumer prices, fell to 12.8 percent in March, the lowest rate of increase since September 2006. Month on month, producer- price growth slowed to 1.1 percent.

The hryvnia has lost about 9 percent against the euro in the past month as the government struggles to maintain its pledge to keep inflation within 9.5 percent this year, compared with 22.3 percent in 2008.

Ukraine’s economy will shrink as much as 9 percent this year, twice as much as previously estimated, according to a revised World Bank forecast citing a deterioration in the global outlook and government delays in addressing the crisis.

“We may lower the forecast further if the external environment worsens or the authorities delay anti-crisis measures,” World Bank economist Ruslan Piontkivskyi said at a press conference in Kiev today.

The WB had previously forecast Ukraine’s gross domestic product will contract 4 percent this year.

Tuesday, March 24, 2009

12% GDP Contraction Forecast For Ukraine Economy In 2009

Ihor Burakovsky, the director and board chairman of the Institute for Economic Research and Policy Consulting says that "experts" have forecast a 12% drop in Ukraine's GDP in 2009 and an 18% inflation rate. I'm not sure who the experts in question are, but the number doesn't seem unrealistic at all to me, given the data we are seeing. First some information from the Ukraine Statistics website.

During January-February 2009, indices of industrial products were 67.2% as compared with January-February 2008. This means there was a 32.8% drop in output year on year over the two months. In fact output was up slightly month on month (by 5.4%) in February, in part as a result of the demand for steel exports produced by the sharp Hyrvnia devaluation, and February output was "only" down by 31.6%, following January's 34.1% annual fall, so you could say that things were getting better, but frankly, and at this stage of the game, such finesse is a little but lost on me.

Construction output in January-February 2009 was just 42.7% of the level hit in the same period last year

In the January-February period, cargo shipments were 97.4 mln. tons, that is to say they were just 66.5% of the volume of goods transported during January-February 2008.

In January 2009, Ukraine exports were 2439.6 million dollars while imports were 2041.8 million dollars. This means that exports were down 33.4% while imports were down 56% over January 2008.

In February 2009, the consumer price was up 1.5% over January, up 4.4% so far this year, and up 20.9% over February 2008.

In January 2009 real wages and salaries of employees were down by 19.4% when compared with December 2008. Also total wages in arrears stood at 1525.1 million UAH as 1 of February 2009, up from 1123.5 million UAH on 1 January 2009 (35% increase on the month)

The unemployment rate (using the ILO methodology) for January-September 2008, on average, was 6,5% of economically active working age population. Unfortunately this is the most recent labour force survey data we have. Undoubtedly these numbers have increased significantly over the last 5 months.

In 2008, the Ukraine GDP was up 2.1% when compared with 2007, which means, if the so-called "experts" prediction is anywhere near right (and it doesn't look that unrealistic) the GDP growth chart since 1993 will look something like this, which for a comparatively poor country struggling to catch up is little short of a disaster.

Ukrainian still has not received the second installment of a $16.4 billion loan from the International Monetary Fund although Ukrainian Prime Minister Yulia Timoshenko said last week that "she is confident" it will be agreed to.

One of the sticking points with the IMF had been the projected 2009 budget, but Ukraine’s Parliament last week changed the 2009 state budget law to strengthen the central bank’s independence, meeting one key IMF demand for getting the second installment of the loan (we will remember the Parliament was debating sending the governor to prison for allowing the currency to float, again another one of the key IMF demands). Lawmakers need to pass two more bills to qualify for the $1.9 billion installment of the IMF loan, which originally was expected on Feb. 15, according to Oleksandr Shlapak, the first deputy head of the president’s staff, with the central bone of contention being the 5% budget deficit projected for 2009, and on a lot lower contraction forecast than the current "most realistic case" scenario.

Really looking at all this, what we have here is a country in total monetary, financial, and economic disarray, and this is before we even start to think about the demographic unwinding which lies ahead. No wonder Dominique Strauss Kahn recently warned of the catastrophe which looms before us. I seriously doubt any knows what to do about all this, I certainly don't. Tear my hair out perhaps. But I already have precious little left.

Wednesday, February 25, 2009

Ukraine Debt Ratings Cut to CCC+ by S&P

Well in some countries it never rains but it pours, as they say. Following the news that Ukraine GDP contracted at an annual rate of 20% in January, today we learn that S&P have cut Ukraine's long-term foreign currency rating to CCC+, seven levels below investment grade. Ukraine’s rating is now the lowest in Europe and at the same level as Pakistan. S&P left the outlook negative, suggesting there may be more to come.

To give us all some idea of what this means contracts to protect Ukraine’s government bonds against default now cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps today. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide.

The extra yield investors demand to Ukrainian bonds instead of U.S. Treasuries has risen 10-fold in the past year and at about 32 percentage points is the highest of any country with dollar-denominated bonds except Ecuador, which defaulted in December, according to JPMorgan Chase & Co. EMBI+ indexes.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade only two weeks ago and kept the outlook “negative,”. Moody’s said yesterday that there is a good possibility they will cut their Ukraine ratings within three months.

The hryvnia tumbled yesterday, closing at a record low against the dollar, on all the talk about credit downgrades and Eastern Europe's economic problems. The currency dropped 3.4 percent to 9.26 per dollar at 6:10 p.m. in Kiev, below the previous lowest close of 9.10 reached on 18 December last. The hyrvnia has now lost more than 50 percent against the dollar in the past six months.

Ukraine started this crisis with comparatively little state debt, but as the costs of bailouts and recession fighting have mounted the debt has surged upwards. Total state debt increased in November by 33 percent to $22.1 billion from $16.6 billion the previous month, according to recent data from the Ukraine Finance Ministry. In December, the total debt increased by a further 9 percent - up to $24.1 billion. The government initially targeted a budget deficit of 18.8 billion hryvnias ($2.34 billion) or about 2 percent of gross domestic product in 2008. It later cut the gap below 1 percent of gross domestic product, meeting an agreement with the International Monetary Fund which approved a $16.4 billion loan to Ukraine to help stabilize the economy.

Thus Ukraine’s total state debt in 2008 increased by 37 percent to $24.1 billion from $17.6 billion in 2007. It is however still at a pretty low level, being estimated by the IMF in their last standby loan report to rise to some 17.4% of GDP in 2009. The real problem are the mounting liabilities in the private sector, and how these can fall inwards onto state finances.

Update: Wages Fall Rapidly

Average Ukrainian wages fell by 16.8% in January (to UAH 1,665 per month) over the level of December, according to the State Statistics Committee yesterday. The highest average wages were paid out in Kyiv (UAH 2,794 per month), down 21.3% over the level of December 2008. We need to treat this kind of data with some caution, since obviously seasonal factors are at work, and average wages were still up (by 9.4%) over January 2008.

However inflation is still very high in Ukraine, so even with a 10% annual increase in money wages real wages are falling sharply. Inflation was up again in January rising at a 2.9 percent rate over December, which compares with a 2.1 percent rise in December over November. the country's Economy Ministry said. Year on year inflation was running at 22.3% in January.

In addition to the drop in real wages (and the rise in unemployment), there is a problem with unpaid salaries. As of Feb. 1, 2009, the volume of unpaid salaries and wages was up by 35.7% compared to January 1, with the largest volume of wage arrears being observed (rather unsurprisingly) in Donetsk region.

Current Account Surplus

On the other hand Ukraine did have a current account surplus of $500 million in January, according to provisional data released by the acting head of the National Bank, Anatoly Shapovalov yesterday (Wednesday). Shapovalov said the first current account surplus in recent years was due to a steeper decline in imports than in exports. However, the overall balance of payments continues to be in deficit since the flow of capital is neagtive, with loan repayments far exceeding the volume of new loans raised. Thus the he financial account deficit was $2.3 billion in January.

Shapovalov estimated that the balance of payments deficit as coming in at $12 billion for 2009, with the National Bank hoping to receive $9.6 billion from the International Monetary Fund in 2009, which "would be a big help," he said.

Ukraine's current account deficit widened to $11.9 billion or 6.7% of GDP in 2008 from $5.3 billion or 3.7% of GDP in 2007, according to preliminary data from the National Bank. The current account deficit grew as the visible trade deficit rose to $16 billion.

Unsurprisingly, with all this going on, bank lending is reducing, and in January, the total consumer loans were down by an annual 1.8 percent compared to a 7.7 percent rise in December 2008.

Wednesday, February 18, 2009

Ukraine GDP Down 20% Year on Year In January

Well, Paul Krugman certainly got it right on this one, the Great Depression may now reasonably be considered to have arrived in Ukraine. Ukraine's GDP declined 20 percent in January year-on-year, according to Valeriy Lytvytsky chief advisor to the chairman of the National Bank of Ukraine. "The decline in GDP in January was about 20 percent according to my reckoning. It's the biggest drop ever. It's a bad start," he said. According to Lytvytsky the construction and industry sectors have been the hardest hit by the economic crisis.

The Statistics Office don't produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening.

Industrial output fell in January for the sixth month in a row, with a 16.1 percent decline between January and December 2008. This was the biggest decrease since January 1994, when there was an 18.6 percent drop. Industrial production in January was 34.1 percent down on January 2008. The year-on-year decline in construction also increased ten-fold, hitting 57.6 percent, Lytvytsky said.

"At the start of last year there was one sector in recession - construction. All the rest were in positive territory. Now only one economic sector is growing - agriculture - with growth of 0.5 percent, within the margin of error. All the other basic industries, which account for about 80 percent of GDP, are contracting."
Valeriy Lytvytsky

Unfortunately this may well be the last month for which I can do this kind of calculation and comparison, since the State Statistics Committee will not be publishing monthly GDP results (as in the past), starting this January and (ironically) as a result of the move to harmonise Ukraine methodology with international-standard, quarterly reporting. I say ironically, since in this case we will be trading short term insight for longer term precision. However, the office will continue publishing monthly results for individual economic sectors like agriculture, industry, construction and transportation, so we maywell be able to invent some kind of "proxy", just to keep an eye on what is happening in more or less real time.

Thursday, January 15, 2009

Industrial Output Continues Its Decline In December

Ukraine’s industrial output continued its rapid decline in December, falling for a fifth consecutive month, led by steel, chemical and machine building. Output tumbled an annual 26.6 percent, following a 28.6 year on year decline in November, and a 19.8% one in October.

December steel production slumped 42.7 percent, chemical output fell 40 percent, and machine building dropped 37.1 percent. The annual contraction rate slowed slightly in December, but this may be a partly a statistical artefact due to what is know as the "low base effect" in December 2007, however output was up by 3.2% in December over November, which may be a result of the sharp drop in the value of the hryvnia. I would be surprised if we didn't see further falls in output, but we will need to wait and see what happens in the coming months.

For a full analysis of what is happening in Ukraine, see my As The Politicians Battle It Out Ukraine's Economy Tunnels South In Search Of Australia