Ukraine Market Report — Q2 2005
Administrative price interventions in food markets, a sharp slowdown in industry, and the first clear evidence that the 2004 growth rate had been a price effect rather than a capability.
Overview
Industrial output decelerated further. Consumer inflation, particularly in food, became the government's dominant political problem, and its response was administrative rather than monetary.
Macro position
The external surplus narrowed as export earnings fell with steel prices while import demand held up on strong consumption. The revalued currency contributed to both sides of that movement.
Inflation in food categories ran well above headline inflation, which is politically the most sensitive configuration there is.
The intervention question
Faced with rising meat and sugar prices, the government intervened directly — price caps, import measures, pressure on traders and administrative allocation.
The results followed the pattern these measures always produce. Capped prices reduced supply into the regulated channel, product moved into informal trade, and the price outside the controlled market rose faster than it had before the intervention.
The commercial lesson for anyone operating in food distribution was that regulatory risk in this market is concentrated in politically visible consumer categories, and that a business selling bread, meat, sugar or fuel operates under a different risk profile from one selling anything else.
Sectors
Metals — output falling, margins compressed by the revaluation and by softer prices.
Food processing — squeezed between administrative price ceilings and rising input costs.
Agriculture — a reasonable harvest in prospect; export logistics unchanged and still binding.
Banking — the sector doing best. Foreign acquisitions of Ukrainian banks accelerated markedly through the quarter, with international groups paying substantial multiples for retail networks.
What the quarter settled
That the 2004 growth number had been a steel price and nothing more. With prices lower and the currency stronger, the same plants produced a fraction of the previous year's contribution, and nothing structural had changed in between.
For a company, the useful reading was that Ukrainian industrial output is a leveraged position on external commodity prices, and any forecast built on extrapolating a strong year is extrapolating someone else's price.
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