Ukraine’s economy under political crisis conditions 2003–2004 forecast International Centre for Policy Studies Seminar-presentation for clients 7 November

Ukraine’s economy under political crisis

conditions2003–2004 forecast International Centre for Policy Studies

Seminar-presentation for clients

7 November 2002

Міжнародний центр перспективних дослідженьInternational Centre for Policy Studies

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

Presentation plan

1. About the International Centre for Policy Studies 2. ICPS 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 forecast7. ICPS proposals for business clients

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



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 forecast for 2003–2004

Tetiana SYTNYK



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'

95Q

3'95

Q1'

96Q

3'96

Q1'

97Q

3'97

Q1'

98Q

3'98

Q1'

99Q

3'99

Q1'

00Q

3'00

Q1'

01Q

3'01

Q1'

02Q

3'02

Q1'

03Q

3'03

Q1'

04Q

3'04



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

Tetiana SYTNYK



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

2

3

4

5

6

7

8

9

10

2001 (estimate) 2002 2003 2004

GDP

Consumption

Investment



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 partners

Goods and services exports

Impact on different sectors of the economy

Tetiana SYTNYK



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

0

5

10

15

20

25

30

35

40

Trade Construction Transport Industry

Private Privatised

Forecast across sectors real % change



0

2

4

6

8

10

12

14

Trade Industry Agriculture Transport Construction

2002 2003 2004

Impact on financial stability

Andrew BLINOV



Exchange rate UAH/USD

5.0

5.1

5.2

5.3

5.4

5.5

5.6

5.7

5.812

'99

03'0

0

06'0

0

09'0

0

12'0

0

03'0

1

06'0

1

09'0

1

12'0

1

03'0

2

06'0

2

09'0

2

12'0

2

03'0

3

06'0

3

09'0

3

12'0

3

03'0

4

06'0

4

09'0

4

12'0

4

• 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

0

500

1000

1500

2000

2500

1998 1999 2000 2001 2002 2003 2004

Current account balance

Trade 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 vigorously 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 reserves

Foreign debt payments

Domestic debt payments

• Remonetisation will persist: in 2003–2004, broad money [M3] 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

1020304050607080Q

1'98

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

20Q

1'01

Q2'

01

Q3'

01

Q4'

01

Q1'

02

Q2'

02

Q3'

02

Q4'

02

Q1'

03

Q2'

03

Q3'

03

Q4'

03

Q1'

04

Q2'

04

Q3'

04

Q4'

04

Consumer prices

Producer prices

Retail prices

Risks to the ICPS forecast

Andrew BLINOV

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

ICPS proposals for business clients

Hlib VYSHLINSKYMaksym MASHLIAKIVSKY



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



“Economic Research” publications package

ICPS can assist you to better understand the economic situation in Ukraine, and thus to make more effective decisions. The “Economic Research” publications package includes:• Analysis and forecasting with regard to the Ukrainian economy• Data from the ongoing consumer confidence survey• Key economic statistics• Analysis of the effects of changes in legislation on doing business in Ukraine



• 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:



Custom services for business

ICPS research commissioned by business clients focuses on alternatives that touch on public policy or strategic business decisions.We use a variety of research tools, including: policy analysis, economic analysis and modelling, sociological surveys, strategic planning and communications.Advantages of research done for business by ICPS:• independent conclusions• high-quality analysis• partnerships to deliver top-notch quality



Key offerings:

• Analysis of policy alternatives and development of recommendations regarding government policy in a given sector• Analysis and forecasting for development in individual markets• Long-term forecasting of macroeconomic indicators and regional development indicators• Economic impact analysis, and particularly impact of investment projects• Analytical support for strategic planning process• Consumer behaviour analysis




Examples of commissioned research:

• “Analytical Support to the Privatisation of the Ukrtelecom: Development of Regulatory Policy”• “Impact Assessment of Western NIS Enterprise Fund Investments on the Economies of Ukraine and Moldova”• “Analysis of the Telecoms Market in Ukraine” (for Kyivstar)• “Impact Analysis of Introducing a Mixed System of Excise Taxation of Tobacco Products” (JTI)• “Developing Policy for Mass Media Support in Ukraine” (Open Society Institute)




Research on Ukraine’s middle class Why study the middle class?

• It accounts for the lion’s share of incomes in Ukraine• It is the most active in various markets (labour, goods, services)• Its behaviour is the most logical/predictable

Due to its unique characteristics, analysis and forecasting of middle-class behaviour are important for business planning

GOAL: to analyse the effect of changes in the size and behaviour of the middle class on market development



Project details:

Jointly implemented with the GfK-USM company and the New Marketing journalMethodology:• sociological surveys

– identifying the middle class

– in-depth interviews with representatives • data analysis and econometric modelling• international comparisonsFOR further information, please visit http://www.icps.kiev.ua/projects/ukr/middle_class

Research on Ukraine’s middle class



Research results:

Annual report (first one to be issued in March 2003):• Analysis and forecast regarding the quantitative and qualitative evolution of Ukraine’s middle class• Forecast regarding behaviour in particular marketsWho is eligible to receive the report: Join the consortium of clients commissioning the researchAdditional possibilities: To commission detailed analysis of middle-class consumer behaviour in a given marketContact persons: Yevhenia Yehorova ([email protected]), Maksym Mashliakivsky

Research on Ukraine’s middle class



Regional trends

Research on the development of regional economies is important for doing business and for making decisions on investment projects in Ukraine’s regionsResearch includes the following components:• analysis and forecasting of main development trends in the regions of Ukraine• assessment of regional economic policy• rating of Ukraine’s regions with respect to their potential



Research includes the following components:

• Regional production• Labour markets• Households• Budgets• Foreign trade• Prices

Regional trends



Research product:

The analytical publication Regional Trends will be issued every six months, starting in December 2002. It is a separate product from the “Economic Research” publications package.The first issue of the regular publication will be sent free-of-charge.Subsequently, annual subscriptions will cost:• For subscribers to the ICPS regular research package — 1,445 hryvnias • For other clients — 1,995 hryvnias

Regional trends

Thank you for your attention!

Documents

Ukraine’s economy under political crisis conditions 2003–2004 forecast International Centre for Policy Studies Seminar-presentation for clients 7 November