Ukraine Market Report — Q2 2006
Three months without a government and the strongest industrial recovery in two years, happening simultaneously. The quarter is the cleanest available demonstration that the two are less connected than assumed.
Overview
The parliament elected in March could not form a governing coalition. Negotiations ran through the entire quarter without producing a government.
Industrial output over the same period recorded its strongest recovery since 2004.
The disconnection
This quarter is the clearest evidence in the archive that Ukrainian commercial activity and Ukrainian government formation operate on largely separate tracks.
Steel mills ran because external prices supported them. Grain moved because contracts required it. Retail expanded because consumer incomes were rising. Banks lent because their foreign parents had allocated capital. None of these depended on which coalition held the parliament, and none paused while the question was unresolved.
What did pause was anything requiring a ministerial decision — licences, permits, tariff rulings, state contracts. For companies in those categories the quarter was lost; for everyone else it was the best in two years.
Macro position
Industrial output up strongly year on year. External accounts deteriorating as the higher gas bill worked through and import demand grew with consumer credit.
Inflation moderate. The currency stable at its administered level.
The current account moved from surplus toward deficit during this year, and that transition is the structural story of 2006 that nobody was discussing at the time.
Sectors
Metals — strong recovery on external demand.
Chemicals — adapting to the new gas price with efficiency investment where possible and reduced output where not.
Construction and real estate — accelerating sharply. Kyiv apartment prices rising at a pace that had begun to attract speculative buying.
Banking — the year's fastest-growing sector. Foreign-owned banks competing aggressively for retail market share with foreign-currency mortgages and car loans.
What the quarter settled
That the absence of a government is not the same as the absence of governance, and that in a market where most commercial activity is private and export-facing, a political vacuum costs far less than it appears to.
The corollary is less comfortable: the credit expansion running through this quarter had no effective supervisor, and nobody in the political system was in a position to slow it.
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