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UKRAINE
Amid the growing political turmoil in Ukraine, the country’s economy is proving remarkably resilient.
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Lechner: Sees a lot of potential for investment in banking and finance |
According to Lechner of RZB, last year FDI comprised 4% of GDP, which covered the relatively small current account deficit. RZB estimates that real GDP will grow by 5.5% this year, a slightly reduced rate compared to 2006 levels. However, it attributes this more to a reduction in energy resource consumption and the impact this is likely to have on the profitability of electric power, gas and water distribution companies. “I don’t think foreign investors will be put off by the political climate,” asserts Lechner. “There is a lot of potential for investment in the banking and financial sector. There could be further privatizations, but this depends on the government.”
European Bank for Reconstruction and Development (EBRD) country economist Elisabetta Falcetti remains optimistic about Ukraine’s economic outlook. “We don’t expect [current political events will result in] a sharp deceleration in growth,” she says, adding that domestic demand, consumption and investment remain strong. According to Falcetti, on the external side metal prices have rebounded, contributing to good trade performance. Non-precious metals make up more than 40% of Ukraine’s exports.
On the fiscal side, according to the EIU, Ukraine’s current account deficit is expected to widen to more than 6% of GDP in 2008; however, strong capital inflows largely in the form of FDI have covered the deficit. The International Monetary Fund (IMF) says that real exchange rate appreciation, strong domestic demand and weakened terms of trade could help reduce that deficit.
On the back of rising consumption and energy prices, inflation in Ukraine is expected to increase to more than 10% this year, but the IMF says that, provided recommended policies are implemented, it could be lowered to around 5% in the medium term.
RZB maintains that the “fundamental position” of the Ukraine currency, the hryvnia (UAH), remains strong, and the central bank has enough foreign exchange reserves to defend the currency.
While economic fundamentals remain intact, the real threat that the current political standoff presents is the slowing of the legislative and market reform process. “Until the current crisis is over, there will be no market reforms,” warns Dinul, adding that “badly needed” reforms will be stalled.
Ratings agency Standard & Poor’s revised its long-term rating outlook on Ukraine from stable to negative, maintaining that if early elections were held, it may not result in a pro-reform market-oriented government, especially as opposition leader Yulia Tymoshenko may be returned to a position of power. S&P; believes that could result in an acceleration of gradual price increases in natural gas imported from Russia, harming the Ukrainian “energy-intensive” economy. “The negative outlook reflects the growing risks that the Ukraine could slide into a full-blown constitutional crisis, paralyzing policy making and undermining economic growth prospects,” says Moritz Kraemer, S&P;’s credit analyst.
RZB believes S&P;’s outlook is too negative and that fresh elections are unlikely to mean a major change in policy or see the return to power of Tymoshenko. The EBRD says some market reforms, including implementing a free trade agreement with the EU required to complete Ukraine’s accession to WTO, were pending approval at the time the current crisis erupted. While it may be slightly delayed, it believes there is still a common political ambition to move toward WTO.
Anita Hawser