Ukraine Market Report — Q3 2004
Economic momentum held through the quarter while political risk priced in sharply. Businesses stopped making decisions and started waiting, which is itself an economic event.
Overview
Output data for the quarter remained strong. Almost nothing else about the quarter was about output.
The presidential campaign entered its decisive phase, and by September the political situation had become the primary input into every commercial decision being taken in the country.
Macro position
The external accounts remained comfortable. Steel prices held, the harvest was good, and export earnings continued to arrive.
The domestic side showed the first strain. Deposit growth slowed as households began holding cash and foreign currency rather than bank balances — the standard early indicator of political risk in this market, and one that appears well before anything shows up in official statistics.
Pre-election fiscal expansion continued and inflation began to move.
Sectors
Agriculture — a strong harvest, substantially better than the previous year. Export logistics were saturated and inland grain prices fell relative to port prices, which is the recurring signature of a transport bottleneck rather than a demand problem.
Metals — unchanged and profitable.
Banking — the quarter's real story. Deposit outflows started in September. The central bank had reserves and used them, and the system held, but the behaviour was a preview of what a genuine confidence event would produce.
Retail and construction — investment decisions began being deferred. Not cancelled; deferred, which is what companies do when they expect the uncertainty to resolve within months.
What the quarter settled
That deferral is the mechanism through which political risk becomes economic cost in this market.
No factory closed and no contract was cancelled. What happened is that hundreds of decisions to invest, hire, expand or sign were pushed into the following year, and the aggregate of those postponements is a slowdown that appears in the data two quarters later with no single event to explain it.
For a company operating here, the practical lesson was to distinguish between counterparties who were pausing and counterparties who were withdrawing. The first resume; the second do not, and the difference is visible in whether they keep talking to you.
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