Ukrainian Economy Anders as Lund 31008

7/30/2019 Ukrainian Economy Anders as Lund 31008

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Ukraines Economic

Convergence with Europe

Anders slundSenior Fellow

Peterson Institute for International Economics,

Washington, DC

Adam Smith Institute Ukrainian Investment Summit

London, March 10-12, 2008


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ISSUES

High growth to

continue

Decent macro Current challenges


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A Dynamic Market Economy

since 2000

Critical mass of marketreforms and privatization

7.4% GDP growth a year

Conservative macro policy Problem: Few reforms

because of messy politics


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Steady Economic Growth

Source: Dragon Capital, Feb 2008.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2001 2002 2003 2004 2005 2006 2007 2008E

percent


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Revaluation of Ukraine

Ukraines GDP was

artificially depressed in thetransition

As other transitioncountries, Ukraine is going

through a revaluation


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Economic Growth in USD

In USD, Ukraines GDP

grew by 24% a year, 2000-2007

GDP rose from $31 in 2000to $138 billion in 2007


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24% a year GDP Growth!


0

20

40

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2005 2006 2007 2008E

$Billion

-5

0

5

10

15

20

25

30

35

Percen

t

Nominal GDP, $ bn Growth rate, %


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Solid Industrial Growth

9.8% a year


0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2001 2002 2003 2004 2005 2006 2007E 2008E

%,yearonyear


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GDP per Capita:$633 - 1999; $2,995 - 2007

Source: IMF World Economic Outlook database, April 2007

05,000

10,00015,00020,00025,000

30,00035,00040,000

Euro area Poland Russian

Federation

UkraineGDP

perCapitaatcurrent

prices,

US

$

1999 2007


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Ukraine Versus Euroland

In 1999, Ukraines GDP percapita was 2.8% of the Euro level

in current prices In 2007, Ukraines GDP per capita

had tripled to 7.9 percent of theEuro levelLikely to double again in four

years


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Compare with Russia In 1989, Ukraines GDP per capita

was 10% higher than RussiasToday, it is 34% of Russias

sheer anomaly

In 10 years, Ukraines GDP percapita should rise more than

Russias


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Ukraines GDP Growth in US$

Follows Russias

-5

0

5

10

15

2025

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007

Percent

Ukraine Russia

Source: Dragon Capital, Feb 2008; UBS, Russia & CIS Daily News, April 4, 2007, JPMorgan


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Compare with Russia (2)

Goldman Sachs: Russias GDP

should rise by 131% in adecade.Then, Ukraines GDP in US$should increase more than 3times in a decade!


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Average $ Wage in Ukraine:Half of Russias.

Why Produce in Russia?

Source: BOFIT Russia statistics; Eurostat; Dragon Capital, March 2007;State Statistics Committee of Ukraine.

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007

USdollars

Russia Ukraine


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Growth Drivers1. Re-monetization2. 66% of Ukrainian youth go to

university more than in the EU.3. Investment substantial: 24% ofGDP

4. FDI very promising: 6% of GDP5. Structural normalization


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Money Supply Can Expand

Substantially

Source: EBRD Transition Reports 2007, 2004; Eurostat.

0

20

40

6080

100

Euro area Ukraine RussiaM2inpercentof

GDP

1999 2006


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University Education More than

in the EU, 1991 and 2004

0

20

40

60

80

100

United

States

Russia Ukraine Euro

area

Poland

GrossEnrollment

Rations

inTertiaryEduc

ation,

Percent

1991 2004

Source: UNESCO statistical database, 2007.


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Sound Capital Investment, 2006

Source: UN Economic Commission for Europe database.

0

5

10

15

20

25

30

Ukraine Euro area

- 13

Russia United

States

Poland

Gross

CapitalFormation,

P

ercentofGDP


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Investments Grow by about

20% a Year


0

5

10

15

20

25

2000

2001

2002

2003

2004

2005

2006

2007E

2008E

2009F

Percent,y

-o-y


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Foreign Direct Investment:

Very Promising: 6% of GDP


0.0

2.0

4.0

6.0

8.0

10.0

2001 2002 2003 2004 2005 2006 2007E 2008E 2009F

US$billion


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Restructuring Has Gone Far

Reasonable de-

industrializationAgriculture: Too large

Services: Still too small8% of GDP should move

from agriculture to services


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Sound Macro

But Inflation WorriesBudget deficit 1-2% of GDP

Public debt 12% of GDPCurrent account balance:

deteriorating but reassuringSufficient international reserves

But Inflation rose to 16 6% 2007


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Budget Deficit Under Control


-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

2001 2002 2003 2004 2005 2006 2007E 2008E 2009F

percentofGDP


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Public Debt Minimal & Falling


0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007E 2008E 2009F

Percentof

GDP


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Current Account:

Deteriorating But Reassuring


-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006 2007E 2008E 2009FPercentofG

DP


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International Reserves:

Sufficient: 5.6 months imports


0

5

10

15

20

25

30

35

40

45

2001

2002

2003

2004

2005

2006

2007E

2008E

2009F

$Billion


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Inflation: Temporary Spike?


-2

0

2

4

6

8

10

12

14

16

18

2001 2002 2003 2004 2005 2006 2007E

En

dofPeriod,%

yoy


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Causes of Rising Inflation

US dollar pegLoose monetary policyLarge capital inflows

International food &energy price rises


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InflationCure1.Tighten budget: Done2.Abandon US dollar peg

(leads to appreciation)3.Move to inflation targeting

4.Raise interest rates5.Deregulate more


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Challenges of theNew Government


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Successful West-orientation of

Foreign Policy1. WTO accession, signed on February 5,could boost Ukraines growth by 1-2 % a

year2. Free Trade Agreement with EU likely to beconcluded before the end of 2008

3. Applied for Membership Action Plan (MAP)with NATO firm4. Ukraine can resolve all trade disputes with

Russia in its WTO accession


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Fight against Corruption

1. Targeting corruption in gas tradeby eliminating of RosUkrEnergointermediary

2. Personnel changes in the taxadministration partly resolved

corruption with VAT refunds3. Personnel changes in customs is

likely to repeat success of 2005


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Economic Concerns

1.Little legislative activity

2.High tax pressure3.Severe corruption persists

But Ukraine suffers littlefrom Western slowdown


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Reform Challenge:

Much Legislation Needed1. A Law on Joint Stock Companies to protectminority shareholders

2. The land privatization moratorium has lapsedbut legislation for land trade is missing.

3. Adopt a Ukrainian Tax Code Unify social taxes

Unify tax collection4. Abolish the Economic Code and improve the

Civil Code


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1. Education: independent testing,

independence of universities, acknowledge international (Bologna)standards

2. Health Care: Introduce national medical insurance, Decentralize financing,

Focus on primary health care

Social Reforms: Badly Needed


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Excessive Tax BurdenUkraines tax revenues

43% of GDP in 2006West European level

High tax burden limitsgrowth


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Tax Burden

Must Come Down

Source: EBRD Transition Report 2007.

0

10

20

30

40

50

2001 2002 2003 2004 2005 2006

Percentof

GDP

CIS-10 Ukraine

S C ti


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Severe Corruption,

But Improving

Source: Transparency International (2007).

0

0.5

1

1.5

2

2.5

3

2000 2001 2002 2003 2004 2005 2006 2007Corrup

tionPerceptionIndex

(Scale

10=highlycleanand

0=highlycorru

pt)

Ukraine Russia

Uk ine S ing G e


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Ukraines Saving Grace:Democracy But Frail

0

1

2

3

4

5

61991 1993 1995 1997 1999 2001 2003 2005

From1

=freeto7=

notfree

Russia Ukraine

Source: Freedom House


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A Few Political Comments

All three major parties arecenter-right parties

Big businessmen behind allpartiesUniquely broad consensus

Corruption is the mainproblem: unstablegovernments preferable


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Conclusions: GoodMacro & growth hold

Ukraine is turning WestReforms may speed up

European convergencewhatever happens


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Documents

Ukrainian Economy Anders as Lund 31008