Ukraine Market Report — Q3 2006
A government finally formed, under a prime minister whose party had lost the previous presidential contest. The policy direction became genuinely uncertain while the economy continued growing without reference to it.
Overview
A governing coalition formed in August after nearly five months of deadlock, producing an administration whose stated economic direction differed from the president's.
Divided executive authority is a recurring feature of this period, and its commercial significance is specific: it does not stop policy, it makes policy unpredictable in timing.
Macro position
Industrial output continued its recovery. Consumer demand was strong and increasingly credit-financed. The external position deteriorated further as the gas bill and import growth both worked against the trade balance.
Inflation was moderate but the monetary conditions underlying it were not. Credit growth was running at a multiple of nominal output growth, which is the standard precondition for a credit event and was visible in the published data at the time.
What was building
Three developments in this quarter mattered more than anything in the political news.
Foreign-currency lending to households became a mass-market product rather than a niche one. Borrowers earning hryvnia took dollar and Swiss franc mortgages because the nominal rate was lower, and neither the borrowers nor most of the lenders modelled what a currency movement would do to the repayment.
Real estate prices in Kyiv reached levels that could not be supported by rental yields, which is the standard definition of a speculative market.
And bank funding shifted from domestic deposits toward foreign parent funding and wholesale borrowing, which meant the credit supply now depended on external conditions rather than on domestic savings.
Sectors
Metals and chemicals — output growing, margins tighter than the volume suggests.
Construction — the boom sector, with capacity constraints in skilled trades already visible.
Retail — expanding rapidly into regional cities.
Banking — expanding faster than it could underwrite.
What the quarter settled
That the risk in the Ukrainian economy had moved. In 2004 the vulnerability was political and the banking system was the transmission channel. By late 2006 the vulnerability was the credit structure itself, and it no longer needed a political trigger to become a problem.
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