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Ukraine: Current Position and Opportunities

Ukraine: Current Position and Opportunities. Valentin Zelenyuk Kyiv Economics Institute, UPEG at EROC/EERC. Ukraine: East and West. Key Economic Indicators. Key Demographic Indicators. Annual growth of 12.1% in 2004 Average annual growth of about 9% in 2000-2004

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Ukraine: Current Position and Opportunities

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  1. Ukraine: Current Position and Opportunities Valentin Zelenyuk Kyiv Economics Institute, UPEG at EROC/EERC 8th Portoroz Business Conference

  2. Ukraine: East and West 8th Portoroz Business Conference

  3. Key Economic Indicators 8th Portoroz Business Conference

  4. Key Demographic Indicators 8th Portoroz Business Conference

  5. Annual growth of 12.1% in 2004 Average annual growth of about 9% in 2000-2004 Was that an Economic Miracle? No! It was just a normal recovery that, on the background of huge economic downfall, may look misleadingly enormous. Did We Have a Miracle in 2004? 8th Portoroz Business Conference

  6. Real GDP Chain Index (Cumulative) Even after strong growth since 2000, Ukraine’s Real GDP is Still under 65% relative to 1990 8th Portoroz Business Conference

  7. 1991: Collapse negative aggregate supply shock due to ‘disorganization’ cuts in demands for inputs inflation in 1993 was about 10,000%!!! 1991-1993: Almost no key economic reforms! This was the main reason for the economic downfall Ukraine faced till 1999. What happened to one of the richest economy of former USSR? 8th Portoroz Business Conference

  8. 1994-1996: First Reforms (pushed by IMF) Tightening of budget Strict monetary policy 1996: Attempt for Key Economic Reforms Kuchma’s ‘dream team’ (V. Yushchenko, V. Pynzenyk, Y.Yekhanurov, etc.) Reforms failed going through the Parliament 1996-1998: Economic Stagnation Slow Reforms 8th Portoroz Business Conference

  9. Fall in Relative Productivity 8th Portoroz Business Conference

  10. 1998: Partial Reforms passed by Kuchma’s decrees to circumvent parliament’s blocking rise in privatization (led by Yekhanurov) ‘single’&simple tax for private entrepreneurs 1999: Stop of downfall in GDP 2000-2004: Economic Boom Boom on world market for steel products Decrease of income tax in 2004 (from varying rate of about 40% to the flat rate of 13%) 12.1% growth in real GDP in 2004! But, still under 65% relative to GDP in 1990! Progress of Reforms 8th Portoroz Business Conference

  11. Orange Revolution 8th Portoroz Business Conference

  12. More Democratic Society Free and competing press People feel their opinion matters and that they can change thing if they get together People at power started recognizing opinion of regular people—that they matter! The ‘white-blue’ elite realized it The ‘Orange’ elite realized it too The very first year after revolution was hard! Consequences of Orange Revolution 8th Portoroz Business Conference

  13. 2005: Sudden Fall in Economic Growth (2.6%)!!! Hard Post-Revolutionary Period 8th Portoroz Business Conference

  14. Recession on world market for steel Possibly strategic reduction at steel works Non-market attempts to control prices Major Reason: ‘Property Rights Shakeout’ Old Oligarchs stopped investing, but rather tried to secure remaining property, New Oligarchs stopped investing and rather tried to grab the lucrative property of Old Oligarchs, Foreign Investors took awaiting strategy Reasons for Poor Performance in 2005 8th Portoroz Business Conference

  15. Property Rights vs. Investments Additional Trouble: Split of the ‘Orange team’! 8th Portoroz Business Conference

  16. Rise of Welfare of Citizens in 2005 8th Portoroz Business Conference

  17. Ukrainian Banking: Positive Example • Annual industry growth is about 50% over the last 5 years. • Relatively High Competition • HHI is about 400 • CR10 is below 60% • Becoming more transparent • Foreign presence is increasing 8th Portoroz Business Conference

  18. 2 1 1 6 11 11 12 16 9 8 19 7 6 11 22 9 7 7 24 15 7 19 12 14 13 12 250 Number of banks 200 150 218 216 215 211 205 100 186 173 168 164 163 162 162 160 160 50 133 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 July 2006 76 Number of registered local capital banks Number of banks with foreign capital Banks with 100% foreign capital Ukrainian Banking: Number of Players 8th Portoroz Business Conference

  19. 30,0 25,0 20,0 % 15,0 30,0 24,0 10,0 16,2 15,9 15,5 15,5 15,0 14,5 5,0 0,0 01.01.00 01.01.01 01.01.02 01.01.03 01.01.04 01.01.05 01.01.06 01.07.06* Banking: Share of Foreign Ownership 8th Portoroz Business Conference

  20. Banking: Share of Foreign Ownership 8th Portoroz Business Conference

  21. Ukraine: Comparative Advantages 1. Relatively high level of human capital • in math, theoretical physics and chemistry • airplanes and aeronautic equipment • electronics (for military and aeronautics), etc. 2. Good geographical location: • on the crossroads b/w Asia and Europe • relatively decent transportation and • communication infrastructure 8th Portoroz Business Conference

  22. Ukraine: Comparative Disadvantages 1. Small reserves of oil and natural gas??? • not infected by the “Dutch disease” • not infected by the “Venezuela disease” • (or “Russian disease”?) 2. Absence of a Clear Signal from the EU • public is confused on international policy • increased Russian influence 8th Portoroz Business Conference

  23. More Stable Could be More Stable under Broad Coalition Exist Good Opposition Government is More Pragmatic and United Very Close to Enter WTO Interested in Further Economic Reforms Likely to Enter NATO, but not before 2008 Country Economic Perspectives Seems to be: Very Bright! Current Political Situation 8th Portoroz Business Conference

  24. Further Economic Reforms Needed • Economic Forecast: • 2006: GDP growth 7.5%, Inflation 11% • 2007: GDP growth 8.2%, Inflation 8.5% 8th Portoroz Business Conference

  25. Need Further Reduction of Tax Burden Corporate Profit Tax (from 25% to 15%) Simplifying Procedure VAT (from 20% to 15%) Need Pension Reform Reduction of Social Tax (from 37% to 15%) Needs to be privately-funded. Further Economic Reforms Needed 8th Portoroz Business Conference

  26. Need to Continue Fair Privatization Through Open Auctions. Privatization of largest steel mill in Ukraine, “Kryvoryzhstal”, gave a good example No re-privatization of private property Land must be sold on open auctions Reduction of Oligopoly Power in Real Estate market What is Needed for Economic Miracle? 8th Portoroz Business Conference

  27. Clever Monetary Policy Switch to Inflation Targeting, etc. Strong Banking Encourage merging of small banks into large Promotion of Stock Market What is Needed for Economic Miracle? 8th Portoroz Business Conference

  28. Questionsare very Welcome!!! 8th Portoroz Business Conference

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