Ukraine Market Report — Q3 2012
Output contracting, the construction programme finished, an election in October and a currency defence consuming reserves that were no longer being replaced.
Overview
Industrial output was contracting year on year. The tournament construction programme had ended in June and nothing replaced it. A parliamentary election was held in October.
Macro position
The economy was in a shallow contraction with very low inflation — the standard signature of demand weakness rather than supply constraint.
Reserves continued falling. The exchange rate was held. The current account deficit persisted because export earnings were weak while import demand, though soft, exceeded them.
Administrative measures to reduce foreign currency demand were introduced during the year, which is the standard intermediate step between defending a rate and abandoning it.
Reading the administrative measures
When a central bank begins requiring exporters to surrender foreign currency proceeds, limiting household purchases of foreign exchange, or extending settlement periods, it is not managing a market — it is rationing one.
Those measures are informative precisely because they are a cost that a central bank only accepts when the alternative is worse. Their appearance is a more reliable indicator of exchange rate stress than any published reserve figure, because reserve data can be presented in ways that obscure the underlying position while administrative rationing cannot be disguised.
For a company operating in the market, the practical implication is immediate: when currency controls tighten, the ability to convert and repatriate becomes the binding operational constraint, and it tightens further before it loosens.
Sectors
Metals — contracting on weak external demand.
Chemicals — weak.
Construction — sharp decline after June.
Agriculture — a smaller harvest than the previous year but the sector remained the economy's most reliable component.
Banking — subdued; some foreign groups continuing to reduce regional exposure.
What the quarter settled
That the exchange rate had moved from a policy choice to a policy problem, and that the instruments being used to defend it were the ones a central bank reaches for last.
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