Fragile Confidence

Economic News

22 Jul 2010
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Despite some positive indicators from local banks, and some bullish behaviour by foreign investors, Ukraine's consumers largely see a gloomy future, according to the latest surveys.



Some analysts fear this could have disturbing results in the run up to the March 2006 elections. These worries have been highlighted by a report published last week by GfK-USM and the International Centre for Policy Studies, which showed that the consumer confidence index had reached a two-year low.



Short-term negative expectations, the market research company said, intensified in September as "the political situation in Ukraine suddenly came to a boil, resulting in the dismissal of the Tymoshenko government and an apparent split in the Orange coalition".



Another independent monitoring body, the Razumkov think-tank, also confirmed a fast erosion of public faith in state economic policy.



Public trust in economic policy institutions, according to the think-tank, reached its zenith in April 2005, with 53.5% of the population in favour of economic policy developments. Yet by October, only 21.2% of people polled by the agency expressed confidence in the state authorities.



Nevertheless, the report pointed out that public trust is still higher than before the 2004 presidential elections. Many Ukrainians appreciate progress in areas such as pensions, democracy and freedom of speech, as well as the improvement in Ukraine's international standing.



Meanwhile, in contrast to previous periods of declining economic expectations, the negative shift has not yet had any impact on the banking sector's liquidity. On the contrary, the local banks seem to have been successful in persuading the population to keep their money in their accounts, rather than under the proverbial mattress at home.



According to information published recently by the National Bank of Ukraine (NBU), the total volume of private deposits rose by 55% in the first 10 months of 2005, reaching a total of $12.6bn, some 16% of Ukraine's projected GDP this year. While still low, the increase in household wealth stored in the banks suggests that an uptake in financial services is set to continue.



Yet the cooling of consumer buoyancy is disappointing news for economic policy-makers hoping for a bounce back in economic growth towards the end of 2005.



According to the State Statistics Committee of Ukraine (SSCU), real GDP was 2.8% higher in January-September 2005 compared to the same period last year.



Despite a slight improvement in agriculture and extracting industries, few now expect that GDP growth will surpass 4% this year - very low compared to the feverish 12.1% recorded in 2004.



Private consumption, analysts say, played an important role in fuelling last year's GDP growth. Yet a sharp increase in disposable incomes last year, largely on the back of a socially generous government budget, has so far failed to make up for a fall in investment confidence and lower international steel prices.



Inadvertently, analysts say, the sharp increase in pensions and other social payments last year may to some degree be responsible for triggering a period of macroeconomic volatility. High demand for consumer goods and services created strong inflationary pressure and drove the demand for imports.



The Consumer Price Index (CPI), according to SSCU, was particularly steep in the food products category, rising by 17.6% during the first 10 months of this year. Prices for services rose by 9.7%, while prices for non-food goods were more stable, at 5.2% in January-October 2005.



Despite negative public expectations and shaky growth dynamics, the view from outside Ukraine remains largely positive. This was confirmed by Prime Minister Yuri Yekhanurov, when he announced on November 2 that the US was planning to give Ukraine coveted "market economy" status in January 2006.



Separately, the successful placement of 600m euros worth of Ukrainian government bonds at the lowest ever 4.95% yield, analysts say, shows that foreign investors continue to maintain their positive expectations about Ukraine.



Yet the most positive recent development, everyone agrees, was the landmark Kryvorizhstal sale, which attracted $4.8bn to Ukraine's state coffers, lifting the pressure on the state budget, while sending a very encouraging market signal to potential investors.



Despite these successes in international waters, Ukraine remains a relatively closed economy, depending on domestic market demand as much as on world market prices for its key commodities, such as steel.



While the new government has been successful in stabilising the foreign side of the economic equation, it must now watch out for any further deterioration in economic expectations at home, which still seem capable of unravelling into a full-scale economic crisis.

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