Orange Clouds

Economic News

22 Jul 2010
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When thousands of Ukrainians took to the streets last week to celebrate 14 years of independence from the USSR, the feeling of euphoria in Kiev was mixed with a sense of restiveness. With the economic growth rate slumping and political uncertainty lingering ahead of the upcoming parliamentary elections in March, the eight-month-old Orange Revolution finds itself under the cloud of unmet expectations.



In ousting the decade-old Leonid Kuchma regime, the Orange movement, led by the new President Viktor Yushchenko, promised to bring back Ukraine into Europe, to fight rampant corruption, to revive the economy and to improve living standards - currently among the lowest in Eastern Europe.



Despite a radical departure from the Kuchma era, the reform-minded government led by Prime Minister Yulia Tymoshenko, President Yushchenko's long-term ally, seems to be facing an uphill battle to maintain the same levels of economic growth witnessed in 2004.



Hailed as the fastest expanding economy in Eastern Europe last year, posting an impressive 12.5% growth in GDP, Ukraine's economic performance in 2004 is a hard act to follow. Export-driven growth hit a soft patch early this year, primarily due to a fall in international prices for metallurgical products, which make up around 40% of Ukraine's exports.



Meanwhile, the domestic market was hit by higher energy prices and the strengthening of the local currency, as well as uncertainty surrounding the political environment - all of which resulted in low investment activity and deteriorating GDP growth.



However, rejecting concerns of economic slowdown expressed by the US State Department at the end of July, Tymoshenko insisted that Ukraine's economy was developing dynamically and that the official statistics continued to paint a positive picture.



Nevertheless, the government has already had to revise its GDP growth target for 2005, down from a stellar 19.1% to a still somewhat racy 8.2%. Meanwhile, the more conservative International Monetary Fund (IMF) thinks 5.5% GDP growth is a more realistic figure for this year. Analysts predict another downward adjustment of government forecast to 6-6.5% in the near future.



Such pace of growth, acceptable by most countries' standards, would be too slow for the Ukrainian economy, which is rising from a very low base, drained by eight consecutive years of sharp economic decline during the 1990s. The country's nominal GDP, according to State Statistical Committee (SSC) revised figures, was just $69.19bn, around $1460 per capita, or at least three times less than in neighbouring Poland.



"Although the new authorities have articulated a vision of sweeping structural reforms," the IMF announced in its latest press release on August 24 that "re-launching robust growth calls for tangible steps to improve the investment climate".



There is a widespread sense, according to the IMF, that "the authorities' policies remain adrift, as illustrated by the introduction and subsequent reversal of price caps on gasoline".



Despite signalling pro-market Western reform, the new Ukrainian authorities have so far been unable to give up the country's age-old attachment to administrative price controls - a hallmark feature of its former communist command economy.



Similarly, its efforts to secure membership of the World Trade Organisation (WTO) by the end of this year continue to be stalled by forces within the parliament opposed to lowering customs duties, which could hurt Ukraine's traditional industries and agriculture. WTO accession, however, remains the main prerequisite for Ukraine's ultimate goal of closer integration with the EU.



At a meeting this week with the US Senator Richard Lugar, President Yushchenko said that Ukraine loses approximately $8bn a year because it is not a member of the WTO and does not have functioning market economy status.



According to one Kiev-based analyst interviewed by OBG in late August, the failure to let the open market decide prices is the main reason why the US and Europe cannot grant Ukraine the critical "functioning market economy" tag - a label that would bolster foreign-investor confidence.



Meanwhile, anticipation that the Orange Revolution would trigger a sharp increase in foreign investment has so far failed to materialise. The data released by the SSC in mid-August showed that the total volume of foreign direct investment (FDI) in the first half of the year has declined by 14.4%, down to $491.3m. In the absence of large privatisations, the rate of FDI, analysts say, will keep declining.



A number of foreign investors have expressed their disappointment with the lack of economic policy coherence and general political turmoil which continues to plague the country. While the government's plans to weed out corruption and to review some of the more dubious past privatisations are welcomed by international democratic watchdogs, business investors look for property rights guarantees, as well as legal and fiscal stability.



Yet the main factor behind the meagre inflow of foreign capital, according to analysts, is Ukraine's slowing pace of economic growth. Investors, analysts say, are unwilling to assume higher risks if the country is not going to offer a solid growth story and potentially high rewards.



Upcoming parliamentary elections in March and a number of high-profile privatisations in the steel and telecoms sectors will no doubt keep Ukraine on the foreign investor radar screen in the next few months. Persuading investors to put their money into the volatile economy at the grassroots level, according to most foreign analysts, will require political consensus and clear economic vision to overcome the country's disappointing legacy of gradualism in market reforms.

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