Ukraine Market Report — Q4 2011
The year closed with growth intact, external accounts deteriorating, reserves falling and the association agreement initialled but unsigned. Three of those four continued into the following year.
Overview
Growth for the full year was solid, the second consecutive year of recovery from the 2009 trough.
The association agreement with the EU was initialled at technical level in December but not signed, its signature suspended over the political situation.
Macro position
The external position deteriorated through the year. Imports grew with the recovery while export earnings softened as global metal prices came off, and the gas import bill remained large despite the discounted price.
The current account deficit widened and reserves declined, because the exchange rate was being held at a fixed level that the underlying flows no longer supported.
This is the same configuration as 2007–2008, in a milder form: a fixed rate defended with reserves while the external balance deteriorates.
The pattern repeating
By the end of 2011 the structure was recognisable to anyone who had watched the previous cycle.
An administered exchange rate. A widening current account deficit. Falling reserves. No external programme disbursing. And a political system with no appetite for the measures that would address any of it before the parliamentary election due the following year.
The difference from 2008 was that household foreign-currency lending had been restricted after the crisis, so the transmission channel to households was narrower. The similarity was everything else.
Sectors
Metals — softening on weaker global demand.
Agriculture — a strong year.
Construction — tournament infrastructure completing, with the end of the programme visible in mid-2012.
Banking — some foreign groups beginning to consider exit from the region.
What the quarter settled
That the recovery had ended without becoming self-sustaining.
Two years of export-led growth had not restored investment, had not repaired the credit channel and had not built any domestic demand engine. When the external tailwind softened, there was nothing underneath it.
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