Ukraine’s Economy May Rebound ‘Relatively Quickly,’ S&P Says

KIEV, Ukraine -- Ukraine’s economy may rebound “relatively quickly” next year after a sharp contraction in 2009, helped by exports, said Frank Gill, Standard & Poor’s primary credit analyst.

Ukraine’s economy may expand 4.5 percent in 2010, compared with a 12 percent contraction expected this year, said Gill in a phone interview from London yesterday.

“We see the potential for a relatively quick rebound next year,” he said. Still, “the outlook remains highly uncertain as it hinges on external demand for metals as well as metals prices.”

The economy is shrinking after nine years of growth as the global crisis cuts access to credit and investment. Prices of commodities, including the former Soviet state’s major exports such as grains and industrial metals, have collapsed and economic turmoil has been aggravated by a political struggle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko over policies needed to meet terms of an international bailout.

“Ukraine faces shocks, which would damage any economy,” said Gill. “Prices for chemicals and steel have declined sharply, while import prices are being pushed higher by rising natural gas tariffs and the exchange rate depreciation. At the same time ongoing political uncertainty is very unhelpful.”

The Reuters/Jefferies CRB Index of 19 farm, energy and metal futures has fallen to the lowest level since June 2002 this year and was down 50 percent from a year ago through March 5. It fell 9.1 percent this year through March 5.

‘Strong Commitment’

Ukraine was forced to turn to the International Monetary Fund help to avoid a default, stabilize the banking system, and aid its currency. The Washington-based lender approved a $16.4 billion loan and gave an emergency handout of $4.5 billion in November. The government’s plans to run a state budget deficit of 5 percent of gross domestic product have jeopardized the second installment, which was expected on Feb. 15.

S&P cut Ukraine’s credit rating to CCC+, seven levels below investment grade and the lowest in Europe, on Feb. 25 saying political turmoil poses risks to the loan. S&P left the outlook negative, indicating a possible further cut.

“It is not clear how strong the commitment of the Ukrainian authorities is to implement the IMF program,” said Gill. “Government debt is quite low, though rising significantly, but the willingness to pay the debt is not clear ahead of the presidential elections,” scheduled to be held by January.

‘Out of Date’

S&P, like the IMF, urges the Cabinet to review this year’s state budget, which assumes economic growth of 0.4 percent.

“Ukraine’s budget is out of date,” said Gill. “A revision of revenues is needed in line with deteriorating growth prospects. Last year, the budget largely relied on revenue of value-added tax, which come from imports but imports are seen collapsing this year. Corporate taxes will be lower too.”

S&P expects the hryvnia’s rate to weaken further, said Gill Ukraine’s national currency lost more than 40 percent against the dollar in the last six months. It was trading yesterday at 7.85 per dollar in Kiev.

“The hryvnia depreciation will further drive the deterioration of banks’ asset quality and that is ultimately going to raise sovereign debt levels as the government will need to recapitalize local banks,” said Gill.

Further “exchange rate depreciation raises the risk of bank and corporate defaults and rescheduling,” said Gill. Still, “in the long-term perspective, it will help the economy to be more competitive as balance sheets are freed up again.”

S&P expects Ukraine’s current-account deficit to shrink to 2 percent of gross domestic product by the end of 2009, compared with 6.7 percent last year, said Gill.

Source: Bloomberg