Ukraine's economy gets up off the floor

By bne IntelliNews May 25, 2011

Graham Stack in Kyiv -

After the knockout of 2009, when Ukraine's GDP collapsed by 15%, the economy has got up off the floor and started to grow again, but it's still groggy and vulnerable to any further blows from international turbulence.

The economy recovered macroeconomic stability thanks to International Monetary Fund loans and managed 4.2% growth in 2010, according to preliminary estimates. Beyond stabilisation, growth was driven almost solely by the growth of export-oriented industries, fuelled by Chinese growth for the metals sector and Russian state spending for engineering.

Analysts are predicting a similar growth rate in 2011, which will keep the country ticking over, but won't do anything to make up for lost time. "Even 5% GDP growth is far below the kind of pace that would signify real economic progress," says Oleg Ivanets of ART Capital. "Ukraine needs to be growing 10% a year for seven to eight years to achieve GDP per capita levels of Romania, Bulgaria and Belarus, let alone Poland, Russia or Argentina."

Late 2010 saw a surge in consumer spending, up 10% on the year in December, giving hope for diversification of growth, but rising global food and energy prices in 2011 could kill that off, with an April GfK survey finding consumer confidence had collapsed to levels last seen during the crisis. Banks are still hardly lending to consumers, but have restarted corporate lending, which could support growth in 2011. But as Dragon Capital analysts point out, bank lending to corporates is still only a matter of working capital rather than investment. Companies have extremely restricted access to capital.

So where do we go from here? Reform is the only way forward, is the consensus, but easier said than done. Ukraine placed 145 on the World Bank's benchmark "Doing Business" survey in 2011, compared with Belarus at 58 and Russia at 120. In terms of ease of complying with tax legislation, Ukraine was 181 out of 183 in 2011. The World Economic Forum's Global Competitiveness Index places Ukraine at 89th spot, and Russia at 63rd. Given that neither Belarus nor Russia are investor heavens, it should be within Ukraine's capability to jump up the tables without having to turn itself inside out, argues ART Capital's Ivanets.

The current economic recovery, political stability and post-crisis sobriety offer a sterling chance for a coordinated legislative programme to improve business climate. Brokerages such as Dragon Capital argue that there are signs the government knows what is needed, with some major recent moves to reduce red tape including a 60% decrease in types of business requiring permits, the number of state controlling bodies reduced by 60%, and talk about cutting the number of documents needed to start construction projects by 75%.

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