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A difficult road to recovery in Ukraine
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16 June 2010
Within Europe Ukraine has suffered from the
economic crisis more than most – seeing falls
in GDP, actual per capita income, declines in
the banking sector and a halt to construction
projects, with perhaps Moldova one of the few
unlucky contenders able to claim to have had
a harder time. But, to the surprise of many, the
early signs post-election are that this year will
see the situation revive, with GDP, domestic
consumption and investments in the country
all set to increase. This positive trend is expected
to be reflected in the country’s agriculture
and banking sectors, where a resumption of
lending is forecast.
Banks to resume lending
Last year was the nadir for Ukrainian banks
who faced the most difficult conditions in more
than ten years. According to official statements
by the NBU (National Bank of Ukraine),
during 2009 the entire loan portfolio of the
Ukrainian banking system decreased by 2% –
some 718,717 m hr (US$89.8 m). In 2009 the
NBU recalled the licences of eight financial
institutions and started liquidation proceedings
to close them down. Among organisations
affected are ‘Ukrprombank’, ‘Eastern European
Bank’, ‘The Bank of regional development’,
‘Odessa-Bank’, ‘Ukrainian financial Group’,
‘European Bank’, ‘National Standard’ and
‘Prichernomorye’. In addition the operations
of six financial institutions needed to be
stabilised. Three of them were nationalised
by the Cabinet of Ministers of Ukraine
(‘Rodovid Bank’, ‘Kyiv’ and ‘Ukrgasbank’),
which plans to sell them this year. Another
three banks that found themselves in financial
difficulties were subsequently bought by
private investors (‘Prominvestbank’, ‘National
Credit’ and ‘Westerncombank’).
This year the situation is viewed by
commentators as being much better and the
panic observed at the end of 2008 and at
the beginning of 2009 has now evaporated.
Talking to UBI, analysts at Concorde Capital
(a market research organisation) said that the
population’s trust in banks has continued to
increase. From March 2009 until February
2010 retail deposits gained 12.9%, with the
last four months seeing Ukrainians especially
active: inflow was 5.5%. “In December to
January, UAH deposits grew faster than foreign
currency deposits (4.4% vs. 0.2%), signaling an
improvement in confidence in the national
currency”, a spokesperson for Concorde
Capital told UBI. In addition, the banking
sector’s capitalisation (CAR) rose from 15.6%
at the end of September 2009 to 19.3% at the
end of January 2010. This is still insufficient,
and so, just as in 2009, the shareholders will
have to provide additional support to their
banks. Usually this can be provided in one of
two ways: either grant the financial institution
a subordinated debt which should be repaid in
five-ten years, or issue shares.
The most important question today is
whether the financial institutions will start
lending before the end of the year. “There are
isolated cases of mortgages being issued, but
these are more the exception than the norm,”
the president of the Association of Ukrainian
Banks Aleksandr Sugonyako told UBI. Even
loans provided in this way are seeing financial
institutions make significant demands on their
borrowers who are required to provide deposits
of some 30% to 50% of the sum being borrowed. Also the borrower must
provide guarantees of their job security, and pay very high rates of interest
(30% per year in national currency).
Experts predict that banks will resume lending in the second half of the
year. But even so the speed at which lending resumes will be dependent
upon the general macroeconomic environment, NBU policies and
whether a new Anti-crisis Programme is accepted by the new Ukrainian
government. It seems likely that the maximum term for mortgage lending
will be 5 to 10 years and for car purchases just three to four years.
Economy awakens
The worst times for Ukrainian economics do appear to be in the past. Last
year the gross domestic product (GDP) was extremely low and estimated
near 15% down on its pre-2008 peak. This was influenced by a variety of
factors, such as industrial output decreasing by 21. 9%, the plummeting of
investments (from US$10.9 billion in 2008 down to US$5. 635 billion in
2009) and a slump in real income of the population of some 6%.
This year commentators believe that the situation should be much better.
“We expect real GDP to increase 4% in 2010. Export-driven industries,
mainly metallurgy and machine-building, oriented to other emerging
markets, will contribute more than 1 percentage point to real GDP growth
in 2010”, Mykyta Mykhaylychenko, analyst at Concorde Capital told UBI.
Similar predictions have been made by international experts. In
Particular, Standard&Poor’s predicts that GDP will grow 3.5% and inflation
will be 13%. That is still not very optimistic in comparison with Russia
(GDP growth 4. 5%) and even with Kazakhstan (GDP growth 3% to 8%).
Domestic consumption is forecast to increase slowly, by approximately 3%
(in 2009 it fell 10%). But that is a far cry from the pre-depression growth
rate of 16.4%. Overseas investments is also expected to return to the
Ukrainian economy. After the crash in demand, falling approximately 50%
in 2009, this year a recovery of around 6. 8% is expected.
Although the Ukrainian economy has been through recession local
businesses have remained an area of interest for foreign corporations. In
2010 this interest and a desire to buy a company in Ukraine is forecast
to be much stronger. For example, at the end of February the Swedish
corporation Nestle bought Tehnokom Ltd, which produces convenience
foods under the brand ‘Mivina’.
State companies arouse a great deal of interest from international
investors. For example, in September 2009 the State Property Fund
of Ukraine conducted a competition to sell the Odessa Pre-Port Plant.
This competition was held at the end of September and the appointed
winner was the company ‘Nortim’ (the owner is Ukrainian oligarch Igor
Kolomoyskiy), which was ready to pay US$620 m (initial price US$500
m). But later on the State Property Fund of Ukraine cancelled the result of
the competition. This year the Fund prepared a new list of state companies
to be privatised.
Agriculture is more stable
Agriculture suffered from the crisis to a far lesser extent than other
markets. Ministry of Agrarian Policy of Ukraine spokesperson Mykola
Prysyazhnyuk said that this year the harvest is expected to be 45 m to 48 m
tonnes (last year a harvest of 44.8 m tonnes was gathered in).
The high quality fertile soil and relatively cheap labour force make this
segment of Ukraine’s economy particularly attractive to international
investors. The most interesting business for foreign investors is crop
production and its processing. Last year Ukraine was among the top three
grain exporters and exported 24. 9 m tonnes.
Foreign companies which want to invest into the local agriculture
market do face a range of problems. “Among issues that foreign investors
in Ukrainian agriculture face are a lack of expertise in dealing with
local counterparties to obtain lease rights (locals usually get a significant
advantage in securing lease terms and prices); shortage of qualified
personnel (especially in agronomy) and proper quality certification of land
plots acquired; lack of in-house storage capacity and adequate sales and
distribution channels for harvested crops”, says Andriy Gostik, analyst at
Concorde Capital. Also there is a problem of storing the harvest, because
the specialist companies which provide such services do not have sufficient
capacity to cope with demand. Local corporations solve this problem
by building their own capacity. At present, profits of most agricultural
companies in Ukraine are still rather low.
At first glance animal husbandry also appears attractive. The biggest
problem for the local meat market is the lack Ukrainian beef, a shortage
which becomes more severe each year. This shortfall is compensated for
through imports, often illegal, from Brazil and even China. That stops prices
increasing and from time to time causes them to decrease. The opposite
situation prevails in the poultry market, in which local producers have a
monopoly. The biggest of these are ‘Mironivsky Hliboprodukt, ‘Complex
“Agromars’, ‘Ruby Rose Agricol Co’. The market is so competitive that
the Ukrainian corporations plan to export their product to European
Union countries and test their ability to meet the quality control criteria
that apply.
Source:
by Aleksandra Nekrashuk, Ukraine Business Insight
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