Ukraine Market Report — Q1 2013
Industry contracting, reserves falling for a third consecutive year, and an exchange rate held by rationing rather than by the balance of payments. The position was arithmetically unsustainable and politically untouchable.
Overview
Industrial output was contracting year on year, concentrated in metallurgy and machine building. Consumer demand was flat.
Reserves fell for a third consecutive year while the exchange rate remained fixed.
Macro position
The external accounts were the central problem. Export earnings were weak because global steel demand was weak. Import demand exceeded them. The gap was being covered by reserves and by administrative restrictions on currency purchase.
No IMF programme was disbursing. Renewing one required raising household gas and heating tariffs, which the government had declined to do since 2011 and continued to decline.
Inflation was near zero, which in a country with a fixed exchange rate and falling reserves is a symptom of demand exhaustion.
The arithmetic
Stated plainly, the position at the start of 2013 was this. A country with a persistent current account deficit, no programme financing, falling reserves and a fixed exchange rate has a finite number of months before something changes.
The change can be a commodity price recovery, external financing from some source, or a currency adjustment. Two of those three were not available.
Every observer with access to the published reserve data could construct this sum. What could not be predicted was which of the remaining routes would be taken, and when.
Sectors
Metals — contracting; Ukrainian mills at the high-cost end of a weak global market.
Machine building — contracting, with exposure to a small number of export markets.
Chemicals — weak.
Agriculture — the sector still functioning, with planting conditions favourable.
IT services — growing throughout, unaffected by any of the above.
What the quarter settled
That the economy had two independent halves. One — heavy industry — was in structural decline and dependent on external prices it could not influence. The other — agriculture, food and services exports — was growing and largely unaffected by the macroeconomic position.
An investor assessing Ukraine in 2013 who read only the aggregate figures would have seen a stagnating economy. One who separated the two halves would have seen a declining sector and a growing one sharing a currency.
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