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A difficult road to recovery in Ukraine
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 countrys 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 populations 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 sectors 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&Poors 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 Ukraines 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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