Ukraine Market Report — Q2 2009
The bottom of the cycle, and the first quarter in which the difference between businesses that had matched their currencies and those that had not became a permanent competitive gap.
Overview
Output stabilised at a very low level. The quarter was the bottom rather than the recovery, and the distinguishing feature of it was structural rather than cyclical.
The permanent sorting
By this quarter the crisis had sorted Ukrainian business into three groups, and the sorting proved lasting.
Those that came through strengthened. Exporters with domestic cost bases — agriculture, food processing, IT services, some engineering. The devaluation improved their competitiveness by the full amount of the currency move, and their debt, where it existed, was small or matched.
Those that survived damaged. Domestically focused businesses with foreign-currency debt. They spent the following three to five years repairing balance sheets rather than investing, which is why the recovery was so slow.
Those that did not survive. Highly leveraged construction and property developers, importers of durables with currency exposure, and several banks.
The composition of the Ukrainian corporate sector after 2009 is directly the product of this sorting, and it explains why agriculture and IT dominate the following decade while construction and consumer durables lagged for years.
Macro position
The currency stable. Inflation falling as demand collapsed. The fiscal position deteriorating badly as revenue fell faster than expenditure could be cut in a pre-election year.
The IMF programme went off track during the year on fiscal conditions the government could not meet before a presidential election.
Sectors
Agriculture — a very strong position. Devalued costs, world prices in dollars, and an excellent harvest in prospect.
Metals — partial restart as global demand stabilised at a lower level.
Banking — non-performing loans at levels that would take years to work through; foreign parent banks injecting capital into subsidiaries.
Retail — international chains pausing expansion; several exiting.
What the quarter settled
That a large devaluation is not uniformly bad or good for an economy — it is a transfer, from those with foreign-currency liabilities to those with foreign-currency revenue, and the size of the transfer is the size of the move.
Companies do not get to choose which side they are on after the event. They choose it years earlier, when they decide what currency to borrow in.
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