Favourable Forecast

Economic News

22 Jul 2010
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While political squabbles continue, with new stand-offs between the president, the parliament and the prime minister over such questions as land sales and the presidential control of foreign policy, the business community is posting its forecasts of which way the economy is heading in 2007.

The banking sector, which was the most dynamic sector in 2006, for instance, is showing early signs of another boom year and further inroads by foreign players.

Moving up a gear, the Polish Bank Pekao, owned by Italy's UniCredito, announced its plan to spend another $100m to set up new branches in Ukraine last week. Reinforcing the trend established last year, the bank is planning to focus on delivering retail-banking products to Ukrainian customers.

On the corporate side, UniCredito will benefit from its merger with Germany's HVB that has a strong corporate client base in the country.

Meanwhile, there was news of Electron Bank, a small Ukrainian bank being sold to Austria's Volksbank - yet another confirmation that the foreign acquisition spree, which began in earnest last year, is not about to end.

Contrary to 2006, foreign players are expected to make a play for more than one hundred of the small banks - a less expensive way to gain a foothold in Ukraine's highly promising, yet still risky market.

With four large Ukrainian banks snapped up by foreign banks last year, there is now a shortage of sizeable banks for sale. The price of banking assets, too, has become in some cases, a barrier to further entry.

Although an acquisition of a small bank offers an easy way to acquire a banking license and presence in the country, the organic growth, industry insiders say, is still constrained by a challenging business environment.

In its worldwide Economic Freedom report, the US based Heritage Foundation confirmed this week that Ukraine needs to do more to liberalise its monetary, financial and labour regulations to speed up economic growth.

Ukraine was ranked 125 out of 157 countries rated by the Foundation in 2006 - a few places lower than a year before, although some argue this may due to a change in scoring methodology.

Regardless, there is recognition among Ukrainian reformists that their political agenda has gone slightly off track. There is an urgent need to resume WTO accession talks and to improve Ukraine's basic human and physical infrastructure to increase its global competitiveness.

Although there has been a noticeable shift in general policy direction, with Ukraine treading a careful path between Russia and the EU, optimists argue that internal market forces are powerful enough to keep the country moving forward.

The widely reported boom in property prices is a case in point. It was reported in the British press last week that property prices jumped by 25% in the last two months of 2006.

There are numerous instances of some properties increasing six times in value in the last three years. This has prompted analogies of Kiev now going "the Moscow way", rather than the Central European price path as was thought last year.

Sceptics argue that high property prices are largely a result of very slow increase in supply, which artificially inflates the market.

There is a mix of signs and opinions about which way the Ukrainian economic development is heading in 2007. However, the overall consensus is that the main story in Ukraine is still one of growth and unexplored opportunities for foreign investors. The most likely winners in 2007, it seems, however will be ground floor investors in most dynamic banking, real estate and telecoms sectors, which continue to provide the most compelling story of economic expansion.

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