Ukraine Market Report — Q2 2013
A very large harvest in prospect and an industrial sector still contracting. The gap between Ukraine's two economies widened further, and the currency position deteriorated in every month of the quarter.
Overview
Growing conditions were favourable and a very large grain harvest was in prospect. Industrial output continued contracting.
The reserve position deteriorated further and administrative restrictions on the currency market were extended.
The two economies diverging
This quarter shows the divergence in its clearest form.
Agriculture was heading for one of its strongest years, with favourable weather, expanded planting and a global market that wanted the product.
Metallurgy, machine building and chemicals were contracting simultaneously, hit by weak external demand, high energy costs relative to their competitiveness, and in some cases by trade measures in their export markets.
The two halves of the economy were not connected by anything except the exchange rate. Agriculture wanted a weaker currency; industry needed one; households and the government wanted the fixed rate maintained.
An economy in which the tradeable sectors need a currency adjustment and the political system cannot deliver one is an economy waiting for an external event.
Macro position
Output contracting. Very low inflation. Reserves falling. Exchange rate fixed with tightening administrative support.
Trade frictions with the principal eastern export market increased through the summer, affecting several categories of Ukrainian goods and reinforcing the case for the EU trade agreement scheduled for signature in November.
Sectors
Agriculture — heading for a very strong year.
Metals and machine building — contracting.
Chemicals — weak.
Retail — flat, with consumer credit still restricted.
IT services — growing.
What the quarter settled
That the exchange rate had become the central economic question, and that no route to resolving it existed that the political system was prepared to take before it became unavoidable.
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