Ukraine Market Report — Q3 2009
A stabilising economy, an excellent harvest and a fiscal position deteriorating into an election. The quarter is a study in how election-year politics undoes crisis-year adjustment.
Overview
Output stabilised and began a slow recovery from a very low base. The harvest was excellent and, with a devalued currency, highly profitable in local terms.
The fiscal position deteriorated as the presidential election campaign began.
The election-year pattern
This quarter shows a pattern that repeats across the entire archive.
A crisis produces the political conditions for adjustment, because the alternative is visibly worse. As the crisis recedes, those conditions dissolve, and the measures that remain unimplemented at that point tend to remain unimplemented indefinitely.
The fiscal consolidation agreed under the IMF programme was the casualty. Social spending increases were legislated in the run-up to the election, revenue remained depressed, and the programme went off track.
The commercial consequence was that Ukraine entered 2010 without external programme financing, with a large fiscal deficit and with a banking sector still carrying unresolved bad assets.
Macro position
Industrial output recovering slowly from the trough. Currency stable. Inflation moderating. Fiscal deficit widening.
Reserves low relative to obligations, with a substantial external repayment schedule ahead.
Sectors
Agriculture — the standout. Record exportable surplus, competitive costs, strong world demand.
Metals — recovering as global demand returned, though at lower prices and volumes than 2007.
Banking — stabilised but not repaired. Lending remained effectively frozen for anything other than short-term working capital.
Construction — still stopped. The stock of unfinished buildings from 2008 remained unfinished.
What the quarter settled
That the credit channel would not reopen quickly. Banks with damaged balance sheets do not lend, regardless of policy rates, and an economy without a credit channel recovers only as fast as its companies can fund themselves from cash flow.
That constraint determined the pace of the entire 2010–2013 recovery, and it is the reason the recovery felt so much weaker than the headline growth rates implied.
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