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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.


Anonymous said...

Thank you for your post, Edward.

Two things to mention, which have some connection to your blog:

1. Population drop in 2008 in Ukraine: 229'000 (slightly less than in previous year)

2. Worst Case GDP growth scenario for Ukraine after IMF: -8 to -10%

Anonymous said...

Holy cow...20% in one year? That has to be a record for an industrialized country.

Anonymous said...

20% year-on-year basis, so here it means that the GDP of January 2009 is only 80% of that in January 2008.

Edward Hugh said...


"20% year-on-year basis, so here it means that the GDP of January 2009 is only 80% of that in January 2008."

Yes, that's exactly what it means, and falling.

Anonymous said...

I think you have to be careful with these numbers. It looks worse then it is. An economy like ukraine has always been very much unofficial, with a serious improvement in the last years. The moment things go bad people switch back to fraud mode. Less is done officially. The un/underpaid custom officer gets a fee and the goods move in unnoticed. The official economy went into steep recession but part of it simply moved back to the unofficial economy where it actually came from some years ago.
It explains the extreme numbers for me.

Edward Hugh said...


"I think you have to be careful with these numbers. It looks worse then it is."

Well this is a very similar argument to the one that is often presented in the case of Italy, and no doubt there is a good deal of truth in it, but....

Assuming, which I do, that the main danger is Ukraine is one of sovereign default, then this move into the unofficial sector makes things worse not better, since by definition those people who operate in the sector don't pay taxes, while those who work for them claim unemployment benefit to subsideise their very low earnings.

This pattern is already clear in Italy. But in both cases this actually makes things worse not better, since it drives the whole thing into default, a default from which, given Ukraine's underlying demographic issues, it is hard to see them ever being able to retur.

That is Ukraine (and Belorus, possibly Serbia) could soon become part of a new breed of permanent IMF economic "protectorates".

Edward Hugh said...

Hi again, just to show how widespread this issue is, here's an example from Italy:


The Italian public TV recently broadcast an interesting report about the misuse of Redundancy Funds in Italy. According to them, a lot of companies - especially in some areas of Southern Italy (Puglia in particular) - are cheating the state, sending their workers home with the Redundancy Fund, re-employing their employes 'in black' and paying them under the counter.

So, the state is paying to the workers - lets say - 600 € Redundancy Fund, the employer 250-300€ under the counter and the company keeps producing. The workers in this way get approx. 100% of their full-time salaries. No controls from police almost at all, even if some of the public officers responsible for checking the Redundancy Fund requirements were lately arrested.

According to the economist Tito Boeri, interviewed during the report:

- the Italian underground economy is around 15-17% of the Italian GDP, 300 billion €/year. Some estimates: up to 25% of the GDP
- that means at least 100 billion €/year less income from taxes for the state

- the industries living from the underground economy are profiting from the state aid, in this way distorting the market and undermining the future of more productive companies

- the majority of people with a university degree working in Italy are hiding their qualifications to get a post for which they are over-qualified

Anonymous said...

Edward is definatley right with his comments about the shade economy. Even if you don't take into account the effects which he mentioned and assume that a part of the economy went to shadow, the figures still speak a clear language with a 20% contraction year-on-year.

Analysts expect the Hryvnia to dive under 10 to the Dollar this week. A short look on the exchange board shows you that in the meanwhile for one Dollar, 9.5 Hyrvnia are asked.

This is just a simple indicator how worse things get. In the previous months, the Nationalbank could somehow stabilize the decline of the fall, but the fall anyway happens (this NBU policy favours in general the speculators which can nicley profit from the NBU policy..).

I add above an article of the ECONOMIST of this week. Nothing new for close watchers, but a good summary:

Default options
Feb 19th 2009 | MOSCOW
From The Economist print edition

Leaders bicker as the economy sinks

THE D-word is stalking Ukraine. As its political leaders bicker, investors are having nightmares about its defaulting on its sovereign debt. Yulia Tymoshenko, the prime minister, has sought to calm rising investor panic, suggesting that nothing in the government’s finances warrants “pronouncing the word default”. For now, most experts agree. Even though the markets are charging exorbitant annual rates (32%) for Ukrainian dollar debt (see chart), the coffers seem sturdy enough. Sovereign debt accounts for only about one-fifth of total external borrowing of around $105 billion. The government can handle that, at least this year. But an inevitable series of corporate and banking defaults are likely to hasten the economy’s decline.

By now Ukraine should have received the second tranche of a loan from the IMF worth $1.8 billion. But the IMF says Ukraine is not sticking to the conditions of the loan—worth a chunky $16.4 billion in total—and wants greater fiscal discipline. Uncertainty about whether the rest of the loan will be disbursed is causing jitters. But as tension mounts, the president and prime minister are at one another’s throats. President Viktor Yushchenko recently, for the umpteenth time, accused Ms Tymoshenko of “betraying national interests”, by talking to the Kremlin about a $5 billion loan. Playing the anti-Russian card is one of his favourite ways of wooing public opinion in western Ukraine, where there is little love of Russia or its language.

Ms Tymoshenko is resisting IMF pressure to balance this year’s budget, forecast to show a deficit of 3% of GDP. Cutting the deficit would force her to scrap some of the social promises she had made to voters. Mr Yushchenko and Ms Tymoshenko are expected to contest a presidential election in the coming year, and both are playing politics while the sickly economy gets sicklier. Dependent on steel, fertiliser and chemical exports, Ukraine has been hit hard by the global slump in commodity prices. Officials say that industrial output crashed by a jaw-dropping 34% in January year-on-year. Valery Litvitsky, an adviser to Ukraine’s central bank, estimates the economy contracted by as much as 20% in January alone, as a dispute with Russia over gas prices reduced supply and forced the country’s heavy industry to go slow.

The number of Ukrainian banks going bust is meanwhile growing; many Ukrainian workers are on unpaid and indefinite leave; and the currency, the hryvnia, has shed over a third of its value since the autumn. That has made life tough for consumers, many of whom have borrowed in dollars to buy houses and cars.

To make matters worse, Ukraine is now without its experienced finance minister, Viktor Pynzenyk, who has resigned complaining he had become “a hostage to politics”. Opposing the deficit, he refused to approve the budget, and suggested that the government’s overall economic plan was unrealistic. The government is still forecasting that the economy will grow slightly this year, by 0.4%, compared with 2.1% last year. But economists say it will probably contract by around 5% or even 6%.

Anonymous said...

Feb. 24 (Bloomberg) -- Ukraine’s hryvnia tumbled, closing at a record low against the dollar, after Moody’s Investors Service said it may cut the country’s rating because political infighting is hampering efforts to avert a financial crisis.

The currency dropped 3.4 percent to 9.2600 per dollar at 6:10 p.m. in Kiev, below the previous lowest close of 9.1000 on Dec. 18. Moody’s is reviewing whether to cut Ukraine’s current rating of B1, four levels below investment grade, it said today in an e-mailed statement.

The hyrvnia has lost more than 50 percent against the dollar in the past six months as reduced demand for exports and a lack of foreign credit causes Ukraine’s first economic contraction in a decade. The situation is aggravated by power struggles between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, delaying decisions needed to revive the economy and putting Ukraine’s $16.4 billion International Monetary Fund bailout at risk, according to Moody’s.

“The rating warning does not come as a surprise, but reflects the current state of affairs,” said Dmitry Gourov, a Vienna-based analyst at UniCredit SpA. The currency may weaken to 9.8 per dollar by late March, Gourov said, adding that this level may be exceeded if “confidence tumbles.”

The hryvnia touched a record intraday low of 9.7813 per dollar on Dec. 18 after a government official said the weakening currency may trigger defaults on more than half of loans. The cost to protect against a Ukraine default rose to a record high today, according to credit-default swap prices.

“The rating action reflects concerns about how persistent political uncertainty clouds the prospects for an orderly resolution of banking problems, in the context of a severe economic downturn,” Jonathan Schiffer, senior credit officer at Moody’s in New York, said in the report.

Loan Conditions

A cut by Moody’s would bring Ukraine in line with rankings by Standard & Poor’s and Fitch Ratings of B, which is five levels below investment grade. Both have the country on “negative” outlook, indicating they may fall further. S&P said Feb. 16 it may downgrade its rating more than one step, depending on clarification of how Ukraine will meet the requirements of its IMF loan program.

The IMF approved its loan for Ukraine in November on condition that the government balance its budget this year. Timoshenko’s Cabinet plans a 5 percent state-budget gap this year, putting the bailout in jeopardy.

Orange Revolution

Yushchenko and Timoshenko stood side by side during the 2004 Orange Revolution, which swept them into office on promises to raise living standards and move the country closer to the West. Since then, the two most powerful politicians have battled, as Yushchenko criticized the government’s wide budget gap and Timoshenko refused to cut social spending.

Inflation soared to 22.3 percent last month, the highest level in Europe and more than the IMF’s year-end target of 17 percent.

Ukraine’s growth slowed to 2.1 percent last year, compared with 7.6 percent in the previous year. The economy may contract 9 percent this year, according to Alexander Morozov, the chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank.

“Moody’s rating review will examine whether or not these disagreements can be resolved in a constructive manner such that the IMF package continues to function effectively,” according to the statement.

Credit Risk

Credit-default swaps tied to Ukraine rose 44 basis points to 3,857 basis points, according CMA Datavision in London. The default swaps are the most expensive for any government worldwide, higher than Argentina at around 3,200 basis points and Venezuela at 2,480 basis points, Bloomberg data show. A basis point is worth $1,000 on a contract protecting $10 million of debt.

The contracts, which are designed to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deteriorating perceptions of credit quality.

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.

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.net