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Potapenko O.
Vlasova I. A.
Donetsk state university of economics and
trade
after Michael Tugan-Baranovsky, Ukraine
Before discussing future implications of the
global financial crisis for Ukraine’s economy, let us consider if it has
already affected us. The national economic system is integrated into the world
economy closely enough to be involved in the global processes. The eroded
macro-stability of international markets could not but impact internal
developments in Ukraine. The global financial crisis of 2007-2008, as any
other, has been unfolding in several waves. We have survived the first two
without big losses, although not without mistakes.
The first wave rose in 2007, when stock indices of the world’s leading
banks and financial institutions went down. Under the circumstances, risk
capital looking for stable yet high-profitability markets moved from developed
to emerging markets, which continued to show high growth rates and
profitability. According to financial experts, the risk to profitability ratio
in those emerging markets was fairly attractive. As a result, stock markets in
respective countries grew in 2007, China and Ukraine being leaders of such growth.
The inflow of credits was also substantial: in 2007, Ukrainian economy borrowed
USD 24.3 billion in middle- and long-term credits.
The second wave started in early 2008, when the ongoing fall in the
world stock markets re-directed cash flows from one class of assets to another,
in particular to commodities and energy resources. The overall inflationary
background intensified. Inflationary spiral, set spinning in 2007, has been in
motion in 2008. Political instability affected economy. Over the first eight
months of 2008, industrial manufacturers’ prices grew by 36.5%, especially in
such sectors as mining of mineral resources (except for fuel-and-energy ones)
by 70.4%; metallurgy and metal works by 68.1%, coke production by 64.3%; and
the chemical industry by 55.9%. All of these sectors are oriented towards
foreign markets or towards servicing export-oriented production. The
convergence factor (resulting from openness of the Ukrainian economy to global
trends, e.g. to the 2008 consumer price rise in most countries of the world)
also accelerated inflation processes in the domestic consumer markets. In
September CPI amounted to 101.1% (in January-September it amounted to 116.1%),
but it was much less than in 2006 and 2007, when it grew by 2.0% and 2.2%, respectively.
So in general, in Q3 Ukraine had the lowest rate of price rise in the last four
years – as low as 0.5%. The overall inflation was driven, first and foremost,
by rising prices (tariffs) for services. The role of export-oriented production
in the country’s economic growth increased. In early 2008, production growth in
export-oriented sectors accelerated, and the financial resources of the
national economy were re-distributed, in particular through the banking system,
from other sectors into commodities and export-oriented ones. Thus, in the
first seven months of 2008, production growth in metallurgy was 3.5%; in the
chemical industry it was 5.2%. It accounted for relatively high growth rates in
industry at large – 7.3%.
The third wave of global financial crisis forced governments in the
world’s largest economies to revise their policy vis-à-vis financial
markets. In particular, the governments of the USA, the UK, Germany, Russia,
the Benelux States and other countries decided to support some of the troubled
financial institutions. Investors expect the government of Ukraine to take
similar measures. However, the drivers of mortgage and financial crises in the
USA and other developed economies and those forming potential negative
tendencies in Ukraine’s economy are different. In addition, Ukraine has an
“insurance police” of sorts in the form of Euro- 2012. If the planned scope of
work is fulfilled, the country will get a guaranteed inflow of foreign direct
investments, mid-term and long-term loans, because investors worldwide view
such events as image-building, promotional projects with low financial risks.
As a popular saying goes, hope for the best and prepare for the worst. The
current challenges and threats require that public authorities and the private
sector address them effectively and take additional preventive measures.
Given the risks of reduction in export-oriented production due to
weakening global demand and problems with payments under export transactions,
the government should work to stimulate domestic demand for the group of export
goods and, thus, enhance the role of domestic production. It can start with
launching new infrastructure and residential construction projects funded from
the state budget. The government should prevent a sharp decline in grain prices
by urging the Agrarian Fund to purchase grain of this year’s harvest. In order
to manage the financial instability risk, it is strongly advisable to revise
the draft 2009 budget so as to increase capital expenditures, including in construction,
without increasing the budget deficit. To this end, alongside accelerating the
implementation of projects related to Euro-2012, we should unblock
privatization processes. The government cannot do that alone, we need support
from the Verkhovna Rada to get the State Privatization Programme adopted.
Parliament should also pass a package of laws drafted by the government and
geared towards boosting Ukraine’s investment attractiveness. In order to
prevent a banking crisis, NBU should establish principles of refinancing
commercial banks that have short-term liquidity problems for the period of
financial crisis. A currency crisis can be averted with a series of measures
precluding the exchange rate destabilization by speculators. NBU should
continue to pursue the policy of increasing the rate volatility in order to
reduce risks to the balance of payments. Given the limited financial resources
inside the country and shrinking access to foreign loans, businesses face a
difficult choice: either to suspend production and lose markets, maintaining
high prices in expectation of better times, or to reduce prices trying to
restore demand and keep consumers. The latter option is for those manufacturers
who care about their future, expansion and economy of scale; the former is for
profiteers who make large money quickly and drop the production.
The government can undertake to hold consultations aiming to sign
memoranda with investors and large businesses on reducing prices for goods and
services. Only the concerted efforts of the government and National Bank,
supported by Parliament and the business community will enable the Ukrainian
economy to pass the maturity test in times of global financial crisis.