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Current state of things in the Ukrainian economy  investments are welcome

 

Ruslan Pavlenko analyzes the present-day state of the Ukrainian economy and claims that in spite of problems the economy faces, there is enough reason to hope for new investments being put into it.

 

Foreign investors may find it worthwhile to invest into the Ukrainian economy, even though the risks connected with the instability of the political situation have not been eliminated. The rate of growth of the Ukrainian GDP against the general background of the slowing down of the rates of economic development in the rest of the world, looks encouraging enough to attract investments.

 

The results of the economic development in the first five months of the current year have proved to be unexpectedly positive. In the period from January to May, GDP grew by 7.3 percent, which was over two times more than had been predicted by Ukrainian and foreign analysts.

Early in 2003, Ukrainian GDP was authoritatively predicted to grow no more than by 4.5 percent, with 3.5 being the more likely figure. Contrary to these predictions, in the first five months of 2003, the GDP growth rate never went down lower than 6.6 percent (in March), retaining the high rate of growth, the tendency for which was evident in the last three months of 2002 (6.1 percent).

 

Year 2000 2001 2002 2003 (forecast)
World GDP 4.7 2.5 2.6 2.8
GDP of Ukraines leading trade partners 5.8 2.7 3.5 3.5

 

The growth of the Ukrainian economy that began in 2002, steadily continues and the presidential election due next year is unlikely to unsettle this trend toward a stable growth.

 

GDP rate of growth
Year 1996 1997 1998 1999 2000 2001 2002 2003 (Jan-March)
GDP -10.0 -3.0 -1.9 -0.2 5.9 9.2 4.8 7.3

 

The structure of growth goes through a gradual change as well. Though the main source of the GDP growth remains to be exports (up to 70 percent of export ratio), a more active processes are observed at the internal market of Ukraine as well.

In addition to the general economic growth, the growth of gold and currency reserves, low and controlled inflation, and reduction of the external debt are looked upon by potential investors as indicators of stability. In May 2003 alone, the gold and currency reserves grew by 10 percent and reached 6.09 billion dollars. In the first five months of 2003, inflation was 4.5 percent, with the external debt reduced by 300 million US dollars.

The western rating agencies indicated a better credit rating of Ukraine which allowed her to place bonds of foreign loans on the world financial market in June 2003 under extremely favourable conditions. At the same time, the State Administration of Kyiv opened for Ukraine the market of municipal and local loans by successfully placing its bonds on the external financial market.

Of a considerable importance was the successful realization of the budget by the government, the absence of a budget deficit, in spite of an increase in the minimal wage (which affected mostly the salaries of employees working at the state-run institutions funded from the central budget, like schools, research centres, hospitals, etc). The governments initiatives directed at carrying out a number of reforms, in taxation in particular, and the intention to join the World Trade Organization, make the agents operating at the Ukrainian market feel quite optimistic about the future. A resumption of cooperation with the International Monetary Fund and the World Bank is planned for the fall of 2003.

At the same time, it should be mentioned that the factors, upon which the negative forecasts concerning the growth of the Ukrainian economy were based, continue to be present. The political situation continues to be regarded by potential investors as unstable, and it leads to the outflow of capital and shrinking investments. The reforms that have been carried out, are not sufficient and it may mean that the previous development exhausted all the potential for further growth. A sharp drop in the rates of growth of the world economy in general, and of the European economy in particular, decreases the opportunities for growth of Ukrainian exports.

Main obstacles for investors  instability of the rules of the game at the market, governments attempts to interfere in or control the economy, and corruption of the local authorities  have not been removed either.

All of these things resulted in many foreign investors leaving the Ukrainian market in 1996 and in later years, but starting from 2001 they began to come back, though indirectly through investments into Russian companies which work at the Ukrainian market. But Ukraine wants to attract direct western investments rather than have them in such an indirect manner, all the more so in view of the fact that the volume of trade between Russia and Ukraine is continuously decreasing and the rates of export growth are continuously accelerating. The main reason here lies in the introduction by the Russian government of limitations on Ukrainian exports to Russia.

The reasons underlying the successful economic start of the year 2000 did not only lie in the situation at the Asian markets, to which Ukraine exports her rolled metalwork  Ukraines export of engineering products constituted 28 percent of GDP. At the end of last year and at the beginning of this year, the Ukrainian internal market began to grow, and there were several reasons that promoted this growth. It is difficult to forecast any further growth for this year since the consequences of the reduction of income tax paid by the Ukrainian citizens and the increase of the minimal wage are not yet known. At the same time, a considerable role in the Ukrainian economy is played by the money  from 700 million up to a billion annually  those Ukrainians who work abroad (6 million of them), bring to Ukraine.

The structure of the economic development looks quite promising as well. The growth of industry since the beginning of the year has reached almost 12 percent, with machine building growing by 21 percent, and with engineering products being exported to many Asian countries.

The time has come when Ukraine begins to experience an urgent need in foreign investments. Ukrainian companies do not get enough profits to reinvest the money into their development. The capitals that were once taken by Ukrainian businessmen to offshore companies, begin to come back little by little, but cannot provide enough cumulative boost for the Ukrainian economy (Cyprus takes the second place in the volume of investments into Ukraine).

If foreign investments are put only into those spheres which provide fast recoupment of investments, then it stalls investments into the key branches of the Ukrainian economy.

Ukraine needs capital investments coming from big investors  banks, insurance and investment funds and other financial institutions being the most desirable investors.

A considerable role in determining the general state of the Ukrainian economy continues to be played by Kyiv and the Kyiv region which attract almost 80 percent of investments. This year, the Donetsk, Kharkiv and Dnipropetrovsk Oblasts have begun to catch up with the Kyiv Oblast in the rates of development. The rates of growth in construction have been more or less equal throughout Ukraine. All of this makes it possible to say that not only the central but also the peripheral regions of Ukraine are experiencing an economic upturn, and that long-term investments have begun coming to the Oblasts.

A positive factor for attracting long-term investments is introduction of private ownership on land  by 2004, in accordance with the new Land Code, all the land resources must find their owners.

Major construction work  in reconstruction of motor and rail roads, for example  and other long-term government investment projects will effect the economic development in 2003.

Ukraine plans to join the World Trade Organization early in 2004. This most ambitious project of the current Ukrainian government will hopefully optimize the functioning of many branches of the Ukrainian economy, and increase the size of the agents acting in the financial sphere.

Though the major projects of the government such as the tax reform, for example, have not been brought to completion yet, they raise the optimistic expectancy and stimulate growth.

 

The latest data provided by the Derzhkomstat (State Statistics Committee) show that in 2002 1.07 billion dollars of direct foreign investments were made into Ukraines economy, which is more than in 2001 by 32 percent, and further increases in investments are expected in the year 2003.

 

Opinion of economic analysts

Olga Pindyuk, an analyst of the International Centre of Prospective Research:

The sources feeding the growth of the Ukrainian economy, in addition to the better prices at the world markets, have been the following: further development of such branches of economy as the food industry, trade, pulp and paper industry, and printing industry; the longer winter which led the growth of production of electric power and its redistribution as well as the redistribution of heating and water supplies. A considerable role was played by the increase in the volume of construction work.

 

Veronica Movchan, an analyst from the Institute of Economic Research and Political Consultations:

The single biggest negative factor in 2003 may be a bad grain harvest which will lead to a slow-down in the development of agriculture. The growth of the real GDP is likely to take place, according to our forecasts, mostly due to an increase in investments. Such a situation will be observed, ahead of other branches, in construction. It is also of a considerable importance that import of engineering products occupies a sizable part in the structure of imports, and this fact means that investments will be made into industry.

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