Ukraine Market Report — Q1 2012
Growth stalled as external metal demand weakened, while the exchange rate remained fixed and reserves continued to fall. The quarter is where the 2010–2011 recovery visibly ended.
Overview
Growth slowed to near zero. The recovery that had run since 2010 on external demand ended when that demand softened.
Macro position
Industrial output flat to falling, concentrated in metals and chemicals as European and Chinese demand weakened.
The exchange rate remained fixed. Defending it consumed reserves in every month of the quarter, because the current account deficit was persistent and no external programme was disbursing.
Inflation was very low, which in these circumstances was a symptom rather than an achievement — demand was too weak to support price increases.
The position in plain terms
By early 2012 Ukraine held a fixed exchange rate that its external accounts did not support, financed by declining reserves, with no programme financing available and no political will to accept the conditions that would restore it.
That configuration has exactly two possible endings. Either the external position improves on its own, which requires a commodity price recovery that was not in prospect. Or the rate eventually moves.
The interval between recognising this and the movement occurring was, as in 2007–2008, approximately two years.
Sectors
Metals — the sector driving the slowdown. Global prices weak, European demand weak, and Ukrainian plants competing at the high-cost end of the market.
Chemicals — weak, with the discounted gas price no longer sufficient to offset poor demand.
Agriculture — the sector still performing.
Construction — tournament infrastructure in its final months.
Retail — flat.
What the quarter settled
That the export-led model had no answer to a weak commodity cycle, and that the country had spent the recovery years without building one.
Between 2010 and 2012 Ukraine had a functioning export sector, a fixed exchange rate and an available reform programme. It used the first, defended the second and lost the third — and arrived at the downturn with no instruments.
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