Oleksiy Blinov of Astrum -

The National Bank of Ukraine (NBU) has published its survey of business expectations in the second quarter. The survey is based on interviews with 1,242 companies across Ukraine and is representative of the Ukrainian business community.

The results of the survey point to a continued improvement in business sentiment. The Index of Business Expectations increased by 6.2 points on quarter to 121.8 points. The balance of general expectations about the economic and financial state of companies in the next 12 months jumped from a strongly positive 27.1% in the first quarter to an even more strongly positive value of 33.9% in the second. In absolute terms, 44% of Ukrainian enterprises expect improvements in their economic and financial conditions in the next 12 months.

Devaluation expectations sharply declined in the second quarter. In comparison to the first quarter, when 47.3% of respondents stated that they expect the hryvnia to devalue against the US dollar in the next 12 months, the respective share in the second quarter fell to 26.9%. The survey was carried out on May 14-31.

Building optimism

From our perspective, the survey shows that business sentiment is strong and that, like consumer sentiment, it is close to its pre-crisis level. Enterprises are optimistic in every respect, from sales to investment to employment (see chart showing the major components of the Index of Business Expectations).

The best assessment of the current situation and the next 12 months is provided by respondents that sell their goods on foreign markets. For instance, the balance of general expectations about the economic and financial state in the next 12 months in the second quarter stood at 53.1% for companies with exports (but no imports) compared with the Ukrainian average of 33.9%.

At the same time, one of the best expectations was observed in extraction industries. This supports our view that in the metals and mining sector upstream industries are generally faring better this year. We maintain our 'Buy' recommendations for our July top picks: Avdiivka Coke and Yasynivka Coke in the coke sector and Ferrexpo and Northern OMP in the iron ore sector (for more insight, see Astrum Strategy for July'10).

We underline that there is strong optimism in the ailing construction sector. This industry is the leader in terms of general expectations about the economic and financial state in the next 12 months: the positive balance of answers stood at 47.9%. This sector is also the distinct leader in terms of employment expectations: the positive balance of answers is 21.1% versus an average of 5.1%. This supports our view that, despite the fact that the decline in the sector is continuing, this industry is currently at its bottom and the next 12 months will see a recovery.

Growing prices for commodities remain a major concern. Businesses have indicated that the growth of input prices is the most important factor impairing output growth is that prices for raw materials are too high. This is yet another confirmation of the trend that upstream industries have been found themselves operating under more comfortable conditions, which is also reflected in PPI annual growth as high as 25.5%.

At the same time, Ukrainian businesses say that the influence of such factors as exchange rate fluctuations and political instability on output growth prospects has significantly decreased when compared to the first quarter.

Businesses also point to further wage increases in the next 12 months. Their answers indicate expectations that labour costs should grow more intensively than total production costs. However, it is worth noting that these expectations are also connected with the ongoing increases in the minimum wage that are currently influencing a lot of Ukrainian enterprises.