Ukraine Market Report — Q1 2005
A new administration, a reform mandate, and an immediate policy problem: what to do about the privatisations of the previous decade. The answer given in this quarter cost more than the assets involved.
Overview
The new administration took office with substantial public support and an explicit reform agenda. Its first significant economic signal was not a reform but a threat: that privatisations conducted under the previous government would be reviewed and possibly reversed.
Macro position
Growth decelerated sharply from the 2004 pace. Steel prices came off their peak, and the base effect from an exceptional prior year made the slowdown look steeper than the underlying change.
The central bank revalued the hryvnia, strengthening it against the dollar. The stated aim was to contain imported inflation; the effect on exporters was an immediate margin compression on top of softening steel prices.
Inflation was running well above the previous year, carrying through from the pre-election fiscal expansion.
The reprivatisation question
The quarter's defining issue. Statements about reviewing past privatisations moved from a general principle to named lists, and the number of enterprises mentioned varied between officials.
The commercial effect was immediate and broad. Any company that had acquired a Ukrainian asset from the state, at any point, faced an unquantifiable risk to its title. Foreign investors assessing entry postponed decisions until the scope was clarified, and the scope was not clarified in this quarter.
This is worth stating precisely because it is a general lesson: a policy that is correct in principle and undefined in scope does more damage than a bad policy with clear boundaries. Investors can price a known cost; they cannot price an open list.
Sectors
Metals — softening prices, currency revaluation, and title uncertainty at the largest assets. The worst quarter for the sector since 2001.
Consumer and retail — strong, supported by the wage and pension increases carried over from 2004.
Banking — deposits returned quickly after the political resolution. Foreign bank interest in acquisitions accelerated.
What the quarter settled
That a change of government does not by itself improve the investment environment, and that the manner in which past wrongs are addressed matters more commercially than whether they are addressed.
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