Welcome to the U.S.-Ukraine Business Council

Monday, August 17, 2009

UKRAINE BUSINESS NEWS:FOUR ARTICLES

1. UKRAINE: ECONOMY HITS BOTTOM
GDP Actual Rate of Decline was Still Brutal
Analysis & Commentary: by Timothy Ash, Royal Bank of Scotland
RBSMarketplace, Local Markets Strategy | LM Update
London, United Kingdom, Monday, August 17, 2009

2. KIEV PREDICTS REBOUND FROM DEEP CRUNCH
By Roman Olearchyk in Kiev, Financial Times, London, UK, Mon, Aug 17 2009

3.  SOME HOPE FOR STRICKEN UKRAINE IN JULY STEEL JUMP
Ind. output up 5 pct m/m, annual fall still 26-30 pct; Initial Q2 GDP data -18 pct y/y vs -20 pct in Q1
Chinese demand for steel at heart of improvement; Govt hopes for 3 pct growth next year
By Sabina Zawadzki, Reuters, Kiev, Ukraine, Monday, August 17, 2009

4.  UKRAINE SUFFERS SECOND-WORST CONTRACTION ON RECORD
By Daryna Krasnolutska and Kateryna Choursina, Bloomberg
New York, New York, Monday, August 17, 2009
==================================================
1. UKRAINE: ECONOMY HITS BOTTOM
GDP Actual Rate of Decline for Q2 was Still Brutal

Analysis & Commentary: by Timothy Ash, Royal Bank of Scotland
RBSMarketplace, Local Markets Strategy | LM Update
London, United Kingdom, Monday, August 17, 2009

Ukraine's State Statistical Committee (SSCU) this morning released estimates for Q2 real GDP and also industrial output data for July. Both show a slowing in the rate of year on year decline but, that said, the actual rate of decline was still brutal and indeed quite remarkable for a non-conflict economy.

Real GDP is thus reported to have fallen by 18% in Q2, moderating the rate of decline from 20.3% YOY in Q1. In Emerging Europe, Ukraine's rate of GDP decline was second only to Lithuania (minus 13.3% YOY in Q1, and minus 22.4% YOY in Q2) in its severity, and around double the rate of decline experienced by Russia.

In Ukraine's case a brutal terms of trade of trade shock, which has seen prices for metals, Ukraine main export (40% of exports) decline by more than 50% year on year, combined with the impact of the global credit crunch which saw external and bank financing dry up, an FX/balance of payments crisis and a banking sector crisis, alongside recurrent political weakness/logjams have all added to the mix.

In terms of industrial production, output declined by "just" 26.7% YOY in July, a "moderation", when compared to the 30.4% fall in aggregate over the first 7 months of the year.

As of July 2009 industrial production was running at around 67% of the level of December 2006, albeit marking something of a recovery compared to lows reached in January 2009, when industrial production was running only at 56% of the December 2006 level; for five of the past 6 months since MOM output has expanded. This would also suggest that the economy is close to its lows and has now perhaps bottomed albeit it is perhaps too early to speak about sustained recovery.

Reviewing the breakdown of production by industrial branch for the period January through June, while generally it is assumed that metallurgy has been disproportionately impacted, the data suggests a pretty broad based decline.

Thus while manufacturing suffered a 36.6% YOY contraction over this period, within this total metallurgy was down 43% YOY, chemicals down by 44%, with mechanical engineering suffering most, with a 52.5% YOY decline (within the latter category transport equipment/goods lost 65% of output YOY, not surprising given this sector has been disproportionately impacted globally).

Manufacturing sectors which performed best included foodstuffs (down 5.8% YOY), and some light industries, including leather and paper goods where the decline was limited to around one-fifth. Declines in mining (minus 18.2% YOY) and production and distribution of electricity natural gas and water (minus 17.4% YOY) were somewhat more limited.

RECESSION CONCENTRATED IN AREA WITH EXPORT ORIENTED INDUSTRIES
The above data are, however, just aggregates and mask the fact that the recession has been most acutely felt in regions, even cities, with particular concentrations in export oriented industries. For the period January through June, for example, industrial production declined by 46.7% in the region of Zacarpathia and 45.2% YOY in the region of Volyn, while the aggregate decline over this period for Ukraine was 31.1% YOY.

At the other extreme, regions which performed better included Kherson (-8.9% YOY) and Chernivtsi (-16.7% YOY), the former is better known for their rural orientation and hence production was perhaps buoyed by its food industries.

Notwithstanding the regional and sector specific nuances to the recession, the aggregate data does still suggest that the economy hit bottom some time in Q1. That said with an approximate 19% YOY decline in GDP over the first half of 2009, official (e.g. IMF) projections for a real GDP decline of 8% over the full year in 2009 appear optimistic, with a minus 15% out-turn appearing more likely.

The plus though is that this should provide a very low base for 2010, and indeed the government is already speaking of 3% real GDP growth being pencilled in for its budget planning process for next year. This could still prove optimistic, and herein much still depends both on the global economy and the outcome of presidential elections in January.

LINK: http://strategy.rbsm.com/RV/?key=WmAibGGSWhP9GTxZwjekA6yl

View this page for additional Important Disclosure Information for Research Recommendations including Recommendation history:
http://strategy.rbsm.com/disclosures.
-----------------------------------------------------------------------
NOTE: This material is for information only. It is not an offering document and its terms are qualified in their entirety by the final transaction documents in respect of the securities described therein. Certain transactions mentioned may give rise to substantial risks and may not be suitable for all investors. RBS may have positions, deal or make markets in these securities or related derivatives. Prices are based on current information, are subject to change, are not offers to transact and cannot be relied upon as representations that transactions can be effected at such prices. This material is based on information considered to be reliable, but we do not represent its accuracy or completeness.

 

=========================================================
2. KIEV PREDICTS REBOUND FROM DEEP CRUNCH

By Roman Olearchyk in Kiev, Financial Times, London, UK, Mon, Aug 17 2009

KIEV - Ukraine’s gross domestic product contracted by 18 per cent in the second quarter, according to preliminary government figures released on Monday.
The dismal figures mark Ukraine once again as one of the world’s most recession-battered economies. But economists say fresh figures coming in also suggest Kiev is beginning to pull out of recession after a record 20.3 contraction in the first quarter of 2009.

The figures, to be updated on September 30, indicate that industrial production in Kiev’s largely steel export-driven economy increased in July by nearly five per cent compared to June.

“July industrial output data suggest that steel and related sectors delivered first signs of recovery,” said Olena Bilan, an economist at Kiev-based investment bank Dragon Capital.  “As steel companies continue increasing output in August - and they will probably do so in September - we expect overall industrial performance to improve in the second half of 2009.” Nevertheless, industrial growth remained down by a whopping 30.4 per cent in the first half of 2009.

Forecasts by Ukraine’s main lender, the International Monetary Fund, forecast this year’s GDP contraction at about 14 per cent.  Last week, Bohdan Danylyshyn, Kiev’s economy minister, predicted that the country would make a relatively quick rebound, posting annual GDP growth in coming years of some 5 per cent.

“Although global economic recovery is widely expected to be sluggish, Ukraine is set to enjoy a faster upturn compared to its peers due to the high responsiveness of its export-oriented industries to shifts in foreign demand and their strong interconnection with other major economic sectors,” Ms Bilan said.

Ukraine has already received nearly $11bn from a $16.4bn loan package granted last autumn by the IMF in the wake of the global financial crisis. The
emergency loans have helped to stabilise Ukraine’s stretched finances.

Kiev’s banks were shaken up after the national currency plunged by some 40 per cent last autumn. The Ukrainian Hryvnia stabilised at about 8 to the US dollar this year. But it is expected to come under additional pressure in coming months amid political turbulence and as billions of dollars of public and corporate debt matures. The country’s companies are struggling to restructure about $10bn in near-term debt.

“Pressure on Ukraine’s currency is likely to build up in the fourth quarter of 2009,” Ms Bilan said adding that this could further damage the performance of the country’s banks.
LINK: http://www.ft.com/cms/s/0/78dc8e9c-8b3c-11de-9f50-00144feabdc0.html
==================================================================
3.  SOME HOPE FOR STRICKEN UKRAINE IN JULY STEEL JUMP
Ind. output up 5 pct m/m, annual fall still 26-30 pct; Initial Q2 GDP data -18 pct y/y vs -20 pct in Q1
Chinese demand for steel at heart of improvement; Govt hopes for 3 pct growth next year

By Sabina Zawadzki, Reuters, Kiev, Ukraine, Monday, August 17, 2009

KIEV Ukraine's economy showed some signs of improvement in July, largely due to a jump in production in the key steel sector, with the ex-Soviet state now hopeful of growing next year after one of Europe's worst recessions.

Data issued on Monday showed industrial output rose 5 percent month-on-month, including a record 15 percent jump in steel on increased demand from China, and preliminary estimates showed the economy shrank 18 percent in the second quarter against 20 percent in the first.

Production was still down some 30 percent year-on-year for the seven months to July and steel output by more than 40 percent, while other data showed foreign investment fell by 66 percent in the first half of the year.

But Prime Minister Yulia Tymoshenko cheered the monthly data saying it showed "fundamental and strong signals of growth in various sectors and we can certainly speak of signs of a stable improvement in the economy".

"... In the 2010 budget that we will present in September we will give with confidence a GDP forecast (for that year) of 3 percent," she told reporters.
Ukraine's economy is expected to shrink 14-15 percent this year. That compares to about -6 percent in Russia and -2 percent in Kazakhstan. Only Latvia and Lithuania, with forecasts of -17-20 percent for both, are expected to be worse off in Europe.

But in the past week France, Germany and Japan have said their economies have crawled out of recession, while steel demand from China has helped stem losses for the heavy industry put at the heart of the economy by Soviet central planning.

"The actual rate of decline was still brutal and indeed quite remarkable for a non-conflict economy," Tim Ash, head of CEEMA research at RBS, said in a research note.

"The plus though is that this should provide a very low base for 2010, and indeed the government is already speaking of 3 percent ... This could still prove optimistic, and herein much still depends both on the global economy...."

The World Bank estimates Ukraine will post growth next year of 1 percent.

'BRUTAL' OR 'STRONG' DATA?
A slump in steel demand began pressuring the economy last September. The consequent fall in steel production and exports dragged down the hryvnia currency as supplies of dollars were curtailed, which in turn destabilised the banking sector.

Steel production was 30.4 percent down in July on the same months last month and 41.2 percent down in the first seven months of the year compared to the same period a year ago. Revenues were even lower, down over 60 percent, because steel prices are still far lower than a year ago.

Falling tax revenues have stretched state finances, now propped up by an IMF lifeline of $16.4 billion. The extent of Ukraine's woes was reflected in foreign direct investment, which fell 66 percent in the first half of this year to $2.4 billion.

The hryvnia, which has fallen in the past two weeks as the government and banks repay foreign currency debt, traded little changed on Monday at 8.33-8.35/$.

The upside of the currency's decline is that it raises the value of the foreign cash that is flowing into the country in investment and, if hopes of a recovery further west prove well-founded, increased exports by making goods cheaper.

"Given that Ukraine's industry is highly integrated into global markets ... improvements in the industrial sectors of EU countries will stimulate demand for Ukrainian goods in the short term," Economy Minister Bohdan Danylyshyn said in a statement.

"(This) will be an additional positive factor which will help to gradually resume Ukrainian industrial output," Danylyshyn said in a statement on the ministry's Web site. (Editing by Patrick Graham)
=======================================================================
4.  UKRAINE SUFFERS SECOND-WORST CONTRACTION ON RECORD

By Daryna Krasnolutska and Kateryna Choursina, Bloomberg
New York, New York, Monday, August 17, 2009

KIEV - Ukraine’s economy shrank an annual 18 percent last quarter, the second-deepest slump on record, after industrial production and retail spending plunged.

The fall in output followed a record 20.3 percent contraction in the first three months of the year, the Kiev- based state statistics committee said in a statement on its Web site today, citing preliminary figures. The office is due to publish details when it releases the final report on Sept. 30.

The commodity-driven economy slumped after demand for steel, Ukraine’s biggest export, faltered and its related industries sagged. Reliance on foreign-currency borrowing pushed Ukraine’s banks into decline, with 17 lenders now under central bank control. The former Soviet state is relying on a $16.4 billion International Monetary Fund bailout to avert default. Gross domestic product will slump 14 percent this year, the IMF estimates.

“An ‘improvement’ from minus 20.3 percent to minus 18 percent is still a huge negative in anyone’s books,” said Timothy Ash, head of Europe, the Middle East and Africa research at Royal Bank of Scotland Plc in London. “The third quarter will probably also show a steep decline, but favorable base effects might ease the year-on-year decline in the fourth quarter.”

Ukraine’s industrial production has declined through the past year and sank an annual 26.7 percent in July, the state statistics office said today in a separate release. Steel production fell 30.4 percent in July, chemicals output slumped 31.1 percent and machine building dropped 52.9 percent. The three industries produce Ukraine’s main exports, which account for more than 50 percent of total output.

METALS, CHEMICALS 
Metals and chemicals producers including VAT Odeskyi Pryportovyi Zavod, Ukraine’s second-biggest ammonia producer, have posted record losses. VAT
Azovstal Iron & Steel Works said on Aug. 4 it cut steel output by 37.5 percent from January through July to adapt to shrinking markets.

Ukraine’s hryvnia lost 37 percent last year against the dollar, making it the world’s third-worst performer after the Seychelles rupee and the Icelandic krona, and undermining banks’ efforts to repay debt. The currency has lost 3.4 percent against the dollar this year and was trading at 8.3323 at 2:14 p.m. local time.
An export and banking crisis has left domestic demand in tatters. Retail sales have slumped since June last year and plunged 15.9 percent from January through July, the statistics office also said today.

'DEPTH REACHED' 
“The depth of the recession has probably been reached,” Ash said. “I think Ukraine will be slow to bounce back from this.”

Political deadlock between President Viktor Yushchenko, Prime Minister Yulia Timoshenko and the parliament ahead of January elections is hampering an economic recovery. Yushchenko and Timoshenko can’t agree on how to spend budget funds, while Timoshenko has expelled two pro-Yushchenko ministers from her Cabinet.

At the same time, the pro-Russian opposition, led by Viktor Yanukovych, blocked parliament in June and July, delaying the adoption of laws needed to ensure the continued inflow of IMF funds. Yanukovych’s party has also stymied Timoshenko’s efforts to appoint a new finance minister, a post which has been vacant since February.

“The economy is on the recovery track,” Timoshenko said today at a press conference in Kiev. The government will base the 2010 state budget on an assumption of 3 percent economic growth, she added.

To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; Kateryna Choursina in Kiev at kchoursina@bloomberg.net.

LINK: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVXerfYzso7A