ukraines economy: outlook for 20032004 international centre for policy studies senior economist...

Ukraine’s economy:outlook for 2003–2004

International Centre for Policy Studies Senior Economist Andrew Blinov

Presentation for economic counsellors

10 December 2002

Міжнародний центр перспективних дослідженьInternational Centre for Policy Studies

Tel. +380 44 236-4477Web: www.icps.kiev.ua

Presentation plan1. About the International Centre for Policy Studies 2. ICPS GDP forecast for 2003–2004 3. ICPS forecast assumptions for 2003–2004 4. Impact on different sectors of the economy 5. Impact on financial stability 6. Risks to the ICPS forecast

About the International Centre for Policy Studies



What is ICPS? • The International Centre for Policy Studies is an

independent research organisation, founded by the Open Society Institute in 1994

• Our mission is to promote public policy concepts and implement procedures for public policy formulation in Ukraine

• We provide the following services: – public policy research– training for participants in the policymaking process – facilitating public dialogue



ICPS suggests:1. “Economic Research” publications package2. Custom research and other services for business3. New products on offer:

• Research on Ukraine’s middle class• Regional trends

Information on other ICPS services is available on our website www.icps.kiev.ua



• Quarterly Predictions (a review and forecast of the development of the Ukrainian economy, published quarterly since 1997)• Consumer Confidence (quarterly survey of the economic expectations of Ukrainian households)• Economic Statistics (monthly table of statistical data important in doing business in Ukraine)• New Economic Legislation (annual analysis of the effect of legislative changes on doing business in Ukraine)• Policy Studies (research papers on the most important issues of national policy)

The “Economic Research” packageincludes:



Annual subscription conditions for the “Economic Research” publications package from ICPS:• if subscription is taken by 31 December 2002, clients qualify for the special discount price of 1,995 hryvnias + the first issue of Regional Trends publication for free• after 1 January 2003 the subscription price will be 2,495 hryvniasLong-term subscriptions qualify for substantial discounts:• for three years, pay 5,195 hryvnias (save 30%)• for two years, pay 3,995 hryvnias (save 20%)Subscription applications are available and may be submitted via the ICPS website www.icps.kiev.ua

“Economic Research” package terms:



What is Quarterly Predictions?• Analysis of development trends in the Ukrainian

economy• Overview of quarterly events and their evaluation • Quarterly updates of the forecast for economic

developments in Ukraine



What do we endeavour to deliver to our readers?

• Understanding of development patterns of the Ukrainian economy at the macro level

• Vision of the future dynamic of economic processes in Ukraine

• Impact evaluation of governmental decisions on the dynamic of Ukraine’s economy

• Evaluation of changes in the country’s economic activities — GDP forecast



ICPS forecast strengths• ICPS has been regularly generating an economic

development forecast since September 1997• Quarterly forecast updates allow to keep track of new

information and trend changes • Analysis of all available information • Independence

ICPS GDP forecast for 2003–2004



ICPS dampens its vision of economic development for 2002–

2004• In 2002, Ukraine’s GDP will improve by 4.3% • 2003 will see growth decelerating to 3.5%… • … while in 2004 it will bounce back to 4%

7580859095

100105110115120

Q1'95

Q3'95

Q1'96

Q3'96

Q1'97

Q3'97

Q1'98

Q3'98

Q1'99

Q3'99

Q1'00

Q3'00

Q1'01

Q3'01

Q1'02

Q3'02

Q1'03

Q3'03

Q1'04

Q3'04



Real GDP index, seasonally adjusted, Q1’95=100



Comparison of the previous forecast and its updated present

version GDP growth rate, %

Previous forecast

Present forecast

2002 4.5 4.3

2003 5.0 3.5

2004 5.5 4.0

ICPS forecast assumptions for 2003–2004



ICPS downgraded its forecast following a review of

assumptions• Worsened assumptions about public policy developments: – short-term interests will prevail over any long-term vision of

public policy – government decisions will be impossible to approve

• Forced redistribution of property in the course of political struggles

• Downgraded forecast for GDP of Ukraine’s trading partners



Reasons for a less optimistic view

of Ukrainian government policy • Efforts of individuals involved in approving decisions are squandered in political struggles, instead of devoting them to national policy development

• Divergence of opinions regarding political issues dominate over any agreement of opinions regarding economic policy

• Business representatives are directly involved in the political struggle and cannot influence this choice

• The old command-administrative methods of decision making do not work under conditions of political competition

• Public trust in the government is dwindling



Impact on the dynamic of the Ukrainian economy

Capital losses: • Higher risks to domestic investments • Capital outflow from Ukraine and insignificant volumes

of foreign direct investments coming in • Increased costs of private and public external loansConsumer pessimism: • Worsened social expectations and consumer confidence • Decreased household incomes and decelerated

consumption



Forced redistribution of property hinders investment

• Political interests and big business are juxtaposed • Immaturity of the stock market and lack of relevant

legislation hamper a civilised transfer of property • Forced redistribution of property leaves no

opportunity for investors to recoup invested money



GDP, consumption and investment

annual % change

23456789

10

2001 (estimate) 2002 2003 2004

GDPConsumptionInvestment



Consumer confidence index

30405060708090

100110120

09'00 12'00 03'01 06'01 09'01 12'01 03'02 06'02 09'02

Consumer Confidence IndexIndex of Economic Expectations Index of Propensity to Consume



GDP of Ukraine’s trading partners

and export growthannual % change

0

5

10

15

20

25

2000 2001 2002 2003 2004

GDP of trading partnersGoods and services exports

Impact on different sectors of the economy



Downgraded forecast will have a varying impact on different

sectors• The highest risks come from sectors where public property dominates and where hefty cash flows are concentrated: – electricity, gas, and water production and supply – pipeline and railway transport – communications

• Sectors producing investment goods and services, specifically, machine-building and construction, will incur losses

• Highly competitive sectors, like trade and automobile transport, will be less affected



Competition % of respondents

0

10

20

30

40

50

60

70

Trade Transport Industry Construction

Q1'01 Q1'02



Possibilities of mitigating investment risks

• Trouble-free market entry and exit reduce investment risks

• Highly competitive markets and those with a measurable share of private enterprises are more attractive



Ownership % of total number of enterprises

05

10152025303540

Trade Construction Transport Industry

Private Privatised

Forecast across sectors real % change



02468

101214

Trade Industry Agriculture Transport Construction

2002 2003 2004

Impacton financial stability



Exchange rate UAH/USD

5,05,15,25,35,45,55,65,75,8

12'99

03'00

06'00

09'00

12'00

03'01

06'01

09'01

12'01

03'02

06'02

09'02

12'02

03'03

06'03

09'03

12'03

03'04

06'04

09'04

12'04

• In 2002, the nominal UAH/USD exchange rate has not undergone any noticeable changes, due to the following: – a higher than forecasted positive balance of foreign trade – a high rate of transfer receipts

• The worsened balance of payments will cause a slow nominal depreciation: by the end of 2003, the exchange rate will attain 5.55 UAH/USD, while in 2004 it will reach 5.69 UAH/USD

• Real effective exchange rate will be kept at a stable level

Depreciation will resume





Current account balance and trade balance of goods and

services millions USD

-1500-1000-500

0500

1000150020002500

1998 1999 2000 2001 2002 2003 2004

Current account balanceTrade balance



Trade balance will shrink at a slow pace

In 2003–2004, the foreign trade balance will be shrinking, although slower than we had forecasted earlier:

• goods exports will grow at a slower pace, due to the more sluggish GDP growth of Ukraine’s trading partners

• goods imports will climb up less briskly, in view of decreased consumption and investment; the growth will be more vigorous than for exports

• services imports will enlarge in the wake of capital outflows



Gross reserves accumulation and payments on the state debt

millions USD

0

1000

2000

3000

4000

5000

6000

2000 2001 2002 2003 2004

NBU gross reservesForeign debt paymentsDomestic debt payments

• Remonetisation will persist: in 2003–2004, money mass indicators will advance to 30%

Money market and lending activities





Growth of monetary aggregates % y-o-y

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004

М3 (money total)Monetary baseМ0 (cash)





• Excessive liquidity is forcing banks to cut interest rates on loans, with deposit interest rates being simultaneously reduced



Alternative money value% per annum

-10 0

1020304050607080Q1

'98

Q4'98

Q3'99

Q2'00

Q1'01

Q4'01

Q3'02

Q2'03

Q1'04

Q4'04

CPI change during the past yearInterest rate on hryvnia loansInterest rate on hryvnia depositsLoan and deposit interest rate margin


• Excessive liquidity is forcing banks to cut interest rates on loans, with deposit interest rates being simultaneously reduced




• Lending volumes will increase more sluggishly, because of diminished investments and capital outflows

• We forecast that consumer prices will pick up in 2003–2004, by 6% and 5.5%, respectively

• Price growth factors: – moderate increases in tariffs for electricity and public utilities – pressure from growing producer prices

Deflation will cease





Price index dynamics % annual change

-5

0

5

10

15

20Q1

'01Q2

'01Q3

'01Q4

'01Q1

'02Q2

'02Q3

'02Q4

'02Q1

'03Q2

'03Q3

'03Q4

'03Q1

'04Q2

'04Q3

'04Q4

'04

Consumer pricesProducer pricesRetail prices

Risks to the ICPSforecast

The situation will be markedly worse

than our forecast in the event of:



Risks Possible implications 1. A rapid shift of the economy

into the “shadow”2. Financing of the budget

deficitat the expense of NBU loans (e.g., via bonds) 3. Sanctions imposed by theFATF, UN, and the USA

1. An abrupt slump of budget revenues

2. Frozen contacts with international financial organisations, high inflation

3. Impossibility of external loans, blocking of foreign economic settlements

4. A steep price increase for oil and other resources; decelerated dynamic of Ukraine’s economy

4. Abrupt deterioration of the world economy in the wake of global political instability and frequent terrorist incidents



How can economic development be promoted?

• Political forces should separate their political struggles and public policy discussions

• Political parties should declare their vision of public policy and compete to improve the quality of public policy

• Government analysts who are not involved in the political struggle should prepare justifications of decision options and impact assessments

• Comprehension of implications will make politicians responsible for opting for certain decision options



New government formed • In November 2002, the idea of forming the Cabinet of

Ministers on the parliamentary majority basis has been realized

• Yanukovych’s Cabinet has to bring itself to shift from its policy of hasty decisions to strategic long-term judgments

• In order not to become a one-day government, the Cabinet of Ministers should:– make sure each decision maps into government strategy– introduce middle-term budget planning– determine priorities provided with sufficient financing– make government activities transparent in order to gain people’s

and business confidence– sketch in the extent of state support to business

Thank you for your attention!

ukraines economy: outlook for 20032004 international centre for policy studies senior economist...

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