Ukraine Market Report — Q3 2007
An early parliamentary election, an inflation rate moving into the high teens, and the first tightening in international credit markets that most Ukrainian borrowers did not notice.
Overview
An early parliamentary election was held at the end of September, resolving the constitutional standoff of the previous two quarters.
More consequentially, and almost unremarked in Ukraine, credit conditions in international wholesale markets began tightening during August.
The external signal
Ukrainian banks had funded their lending growth substantially by borrowing abroad. The availability and price of that funding was set in markets that had begun repricing risk in the summer.
The immediate effect in Ukraine was small — spreads widened modestly and issuance continued. The significance was that the mechanism the whole credit expansion depended on had just demonstrated it could change.
Very few Ukrainian borrowers, and not many Ukrainian banks, drew the conclusion. Foreign-currency mortgage origination continued at pace through the quarter.
Macro position
Growth strong. Inflation moving into the high teens, with food and administered energy prices both contributing.
The external deficit continued to widen, now to a level where the financing requirement was substantial relative to reserves.
Sectors
Real estate — prices still rising, though transaction volumes had begun to soften at the top of the market, which is the standard first indication of a turn.
Banking — lending growth continued; funding costs beginning to move.
Metals — strong, with global steel prices near their peak.
Agriculture — a better harvest than the previous year, with export restrictions being progressively eased.
What the quarter settled
That the Ukrainian credit cycle was now a derivative of international liquidity conditions.
The domestic story — incomes, house prices, consumer confidence — determined the demand for credit. The supply of credit was determined in London, Vienna and New York, and had just started to become more expensive.
For any company planning capacity, hiring or expansion on the assumption that Ukrainian credit availability would continue, this quarter was the moment to reconsider. Very few did.
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