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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.


Anonymous said...

According to a consensus forecast published by the Economy Ministry on Tuesday, the average real GDP growth will be 1.7% in Ukraine in 2010 and the average yearly inflation will be 14.6%.

The consensus forecast of the Economy Ministry was made available to Ukrainian News.

According to the pessimistic forecast of the Economy Ministry, the Ukrainian real GDP will shrink by 3% in 2010, whereas the optimistic forecast says the real GDP will grow by 7.5%.

According to the pessimistic inflation forecast for 2010, the average yearly inflation will be 23.2%, while the optimistic inflation forecast says the average yearly inflation will be 9.5% in 2010.

The average inflation index for 2010 [December 2010 again December 2009] is estimated at 13.2%, while the pessimistic inflation index for 2010 is 27.9% and the optimistic inflation index is 8%.

The average index of nominal GDP for 2010 is UAH 1,197.47 billion, while the maximum nominal GDP index is UAH 1,448.3 billion and the minimal nominal GDP index for 2010 is UAH 1,072.065 billion.

As Ukrainian News earlier reported, the Cabinet of Ministers has endorsed the inflation index for 2009 at 9.5%. The Cabinet of Ministers expects the real GDP to shrink by 0.4% in 2009.

Anonymous said...

The experts have said that they see Ukraine's adoption of the Euro currency as one possible solution to the current economical recession in the country.

"Though it might seem unrealistic [introducing the Euro in Ukraine], we still have two solutions to the current recession," President of Market Reforms Center Volodymyr Lanovy said at a press conference on Wednesday.

He explained that the first way would be reforming the national monetary system, the principles of credit provision, inflation management and the exchange policies, along with some other reforms.

"Another way is a real transition to the European currency, which is quite realistic. It includes several stages and we have the experience of other European countries to see how it's done," the expert added.

According to him, the process involves forming a free trade zone, which would be followed by significant structural and legal novelties.

"This is realistic, [and] we could do it in 5-8 years," Lanovy said.

According to Deputy Head of World Economy and International Relations Institute of the National Academy of Science Valeriy Novitsky, "it is always bad" for any country to get rid of its national currency

"We see that the UK is struggling against the Euro. As for Ukraine, it is totally irrational," the expert said.

"Does anyone believe that everything is fair and there is no speculation [with the Ukrainian hryvnia exchange rate]?" Novytsky said.

"It is always bad for any country to get rid of its national currency, but in Ukraine's case, with its irrational politics and economy, I think a bigger evil is the freedom some individuals have to realize their plans," the expert said.


Anonymous said...

Dear Edward,

just as a theoretical example:

What would happen if a economy decides to introdue a foreign currency unilaterally?

The nationalbank would then loose its monetary instruments concerning interest rates...

but what would be the real problems?

Best greetings,

Edward Hugh said...

Hi Bob,

"but what would be the real problems?"

Basically two.

a) You can't create money
b) You can't devalue

So to meet (a) exports need to be higher than imports permanently, otherwise - a la Argentina, or Estonia now - you just have less money in circulation every month.

In Ulraine's case this would be OK at today's values if there were no inflation, but this is where (b) becomes a problem, since if you have more inflation than the country whose currency you use, or that currency suddenly becomes a "strong" currency - stronger than you can support - then again you become uncompetitive, and run a trade deficit, and then we are back to case (a) and you start to run out of money.

Basically, I am strongly against this, since in the best of cases it leads you eventually into spiraling deflation, and in the worst to sovereign default.

It doesn't surprise me that Ecuador, the most recent example of this approach, just had to default on bond payments.

Essentially, this is a sort of "naughty children" policy, since it assumes the host society is an unruly child who can never improve. But if it can never improve, then eventually "euroisation" or "dollarisation" won't work for the same reasons they were needed in the first place.

Basically the best road is one of institutional and political reform and improvement, and if you can't manage this, then it isn't clear where you can go.

Needless to say, the additional demographic problems that Ukraine has don't make me at all optimistic that the country can go anywhere (unfortunately).

Anonymous said...

After years of careless lending and bad management practices, many Ukrainian banks are in trouble and are seeking government bailouts.

It’s common in poker games for greed to suck in a player who has been dealt a solid set of cards. The desire to win the whole pot causes some to overplay their hands. The same might be said of the owners of at least seven of Ukraine’s largest banks that are now seeking state bailouts.

Before the onset of the global economic crisis last year, bank owners in Ukraine entertained strong buyout offers from European and Russian financial groups trying to enter what was thought to be a promising market. Offers ranged up to $1 billion.

Many owners turned up their noses. But now they’re begging the state, and ultimately the taxpayers, to pick up the tab and take over banks that offer little in return besides huge liabilities and distressed borrowers.

“Typically, the valuations contemplated by potential buyers for the top 10 Ukrainian banks in 2007-2008 would be in a range of hundreds of millions of U.S. dollars,” said Peter Vanhecke, chief executive officer at Renaissance Capital Ukraine. “Now, of course, these valuations are unrealistic.”

Brian Best, an investment banker at Dragon Capital, said some top bank owners still had a chance to fetch $500 million late last year. Now, “they will be lucky” to get anything close, he said. “It will take probably five years for the banks to return to valuations they had in 2007.”

So what is going to happen to the nation’s more than 180 banks? How many will be saved, and at what cost to taxpayers? How many will fail, and at what cost to their shareholders?

In recent weeks, owners of at least seven top banks have asked for money in return for a majority stake. The government has yet to produce a complete plan for restructuring its troubled banking sector, though officials have said that $5.7 billon could be spent to recapitalize the largest banks. Bloomberg news service, quoting the International Monetary Fund earlier this month, estimated the cost of recapitalizing banks at 4.5 percent of the nation’s GDP – about $8 billion, based on last year’s national output.

“I think a maximum of seven or eight banks will be recapitalized,” said Anatoliy Shapovalov, first deputy head of the National Bank of Ukraine on April 2. He said the final decision is expected by April 16.

No one knows the extent of bad debt. Some banks and government officials minimize the problem. But some analysts believe that overdue loans will rise significantly, particularly those denominated in foreign currencies, especially if the hryvnia and economy don't stabilize soon.

Andriy Nesteruk, an analyst for Phoenix Capital in Kyiv, noted that the National Bank of Ukraine officially reports that 3 percent of loans are non-performing.

But the reality, Nesteruk said, appears to be worse. For instance, Nadra Bank representatives have estimated delinquent loans at 22 percent of portfolio, while Ukrsibbank officials put theirs in the 10-12 percent range.

"We think that even these figures are too optimistic and, according to our estimates, the share of non-performing loans will reach 25-30 percent this year," Nesteruk said.

In neighboring Russia, the Moscow Times on April 9 quoted Sberbank CEO German Gref as saying "the crisis is just beginning for the banking industry" there.

Meanwhile, taxpayers in Ukraine have a chance to get doubly hit. Many are already struggling to get their deposits out of 11 troubled banks already under central bank management. Others have to pay nearly double on their dollar-denominated mortgages because of the sharp hryvnia devaluation and a hike in interest rates.

At the same time, no bank owners have yet announced they will use the wealth accumulated over the years to bail out banks they may have mismanaged into crisis.

Take for example Vasyl Horbal, a 38-year old lawmaker and majority owner of Ukrgasbank, ranked in terms of net assets as one of Ukraine’s top 20 banks. Sources say he could have sold his bank in recent years for hundreds of millions of dollars. But now, with the recession hitting Ukraine hard and his bank shaky, Horbal, a supervisory board member at the central bank, has asked the state to pick up the burden, recapitalizing it in return for a part of stake.

In a telephone interview with the Kyiv Post, Horbal said his bank has been seeking investors in past years, but received no strong offers. Asked why he and other affluent shareholders can not infuse their own riches to prop up the bank in hard times, Horbal insisted Ukrgasbank shareholders were “doing everything to stabilize the situation at the bank,” but their options are limited.

“For banks with foreign capital the first way [to recover from crisis] is to get [help] from the parent bank. But for banks backed by Ukrainian capital, they can apply for help with the state only,” Horbal added.

It maybe unfair that taxpayers have to save the very banks that won’t return their deposits while bankers safely keep hold of their riches. But it’s a step Ukraine’s government must take to keep the system stable, according to Renaissance Capital’s Vanhecke.

“We are not talking about the beer sector or dairy companies. We are talking about the financial sector, which is as essential as government is,” Vanhecke said. “Just as you need police to provide security, you need a banking system to generate and allocate money for the economy. People and companies need to be able to get loans, to deposit and exchange money. If government would not support an essential sector like this, then the whole economy will go under.”

Dragon Capital’s Best said the state should step in to save only the largest banks and the ones that have a viable future.

“If a bank finds itself in a liquidity problem, the national bank should step down and try to support those banks. However, if a local Ukrainian bank has an insolvency problem, meaning it is basically in technical bankruptcy, then I don’t think the national bank’s role is to support those banks,” Best said.

However, some bankers said they had no idea the procedure and conditions for recapitalization, or how candidates for such government assistance will be selected.

“Right now, the national bank resembles a black jeep with tinted windows. We see that its wheels are turning and it is moving, but we don’t know what is happening inside it,” said Serhiy Stratonov, head of the Supervisory Board of Universal Bank.

NBU’s Shapovalov said the most likely instrument for recapitalization would be a sale of government-backed bonds and their investment into the banks’ statutory capital.

Oleksandr Zholud, an economist at Kyiv’s International Center for Policy Studies, warned that this instrument needs to be used sparingly. “In theory,” Ukraine can save all of the country’s banks. “It can issue bonds, print domestic currency to recapitalize these banks, but this could trigger hyperinflation.”

“But it is more realistic, feasible and likely that only about ten of the largest banks will be taken over and saved. Going further than this could end up too costly for Ukraine, and taxpayers,” Zholud added.

Zholud’s predication: Ten banks of the 180 or so banks will go bankrupt and close before the end of the year. (Kyiv-Post)

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