Ukraine Market Report — Q1 2010
A presidential election concluded in February and a new government formed in March. The economy was recovering from a very low base, and the policy question was how the external financing gap would be closed.
Overview
The presidential election concluded in February with a change of administration, and a new government was appointed in March.
The economy was recovering from the deep contraction of 2009, though from a base so low that year-on-year growth figures overstated the improvement.
Macro position
Industrial output was rising year on year, largely because the comparison period was the worst quarter of the crisis. In level terms output remained well below 2007.
The external financing programme agreed with the IMF in 2008 had lapsed the previous year. Renegotiating it was the incoming government's most immediate economic task, alongside a large fiscal deficit and accumulated arrears.
The exchange rate was stable at its post-devaluation level, held by the central bank rather than floating freely.
The financing question
Ukraine entered 2010 needing external financing for three reasons simultaneously: a fiscal deficit that domestic markets could not fund at reasonable cost, external debt repayments falling due, and a state gas company whose losses had become a fiscal liability.
Two routes were available. A renewed IMF programme, which would require tariff increases and fiscal consolidation. Or a bilateral arrangement that reduced the gas import price in exchange for something else.
The choice made in the following quarter determined the shape of the next four years.
Sectors
Agriculture — continuing the strong position established by the devaluation.
Metals — recovering with global demand, at prices and volumes below the pre-crisis peak.
Banking — still repairing. Lending remained restricted; the sector was working through non-performing loans accumulated in 2008 and 2009.
Construction — largely still stopped, with the unfinished projects of 2008 mostly unfinished.
What the quarter settled
That the recovery would be led by exports rather than by domestic demand, because the credit channel that funds domestic demand was still impaired.
An economy recovering through exports rather than credit recovers unevenly — the regions and sectors with export exposure improve while the rest wait, and that divergence was visible across Ukraine throughout 2010.
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