2008 Crisis lessons that went unlearned
Global financial shocks revealed all sore spots in Ukrainian economy, but never taught our government how they should be healed
A mong all Eastern European and Central Asian countries Ukraine was the one to suffer most from the global financial recession, according to the EBRD. 15% drop of GDP, 60% devaluation of hryvnya, 22% inflation and 40% decline in foreign investments sector – these and many other shocks our country had to survive in 2008 – 2009. Officials assure that they learned crisis lessons and are ready to face its new wave fully armed. However, experts at the Goldman Sachs believe that in case European and US problems turn into a new global economic crisis, Ukraine has all chances to lead the rating of the most harmed countries
Dollars conquered the NBU
One of the key campaigns started in Ukraine hot on the trail of the crisis was the struggle against dollarization of our economy, which wrecked the country during the economic recession. In 2004 – 2008 individuals» credit portfolio increased by almost 8 times – from UAH 11 bn to UAH 81 bn. The ratio of foreign currency loans in that amount exceeded 60%. No wonder that after default of the national currency Ukraine became one of the CIS leaders for the number of overdue credits. On the basis of analysis of the IFRS aggregate rate of troubled debts reached the point of 35 – 40%. Banks, forced to form reserves for such troubled debts sunk in hopeless losses.
Crediting import and imported goods bankers simultaneously dug a hole for the balance of payments, speeding the growth of deficit in foreign trade. In 2008 it exceeded US $14 bn and reached the level of 11.7% GDP. Therefore financiers encouraged by the NBU helped to shoot down stability of hryvnya.
Upon assessment of US dollars turnover in Ukraine in 2009 the NBU introduced a temporary prohibition on foreign currency crediting for individuals (it was in force till January 1, 2011). Last fall the parliament passed the law No. 3795-VI which once and for all prohibited loaning individuals in hard currency. Its consequences were visible at once. According to the NBU in 2008 individuals» credit portfolio in hard currency increased by 197.4% (UAH 97.9 bn) up to UAH 273.4 bn and by the end of 2011 it shrank almost 2.5 times – down to UAH 112.7 bn. By the results of 5 months in 2012 it dropped by UAH 99.7 bn.
To lower people’s unceasing demand for foreign currency the NBU resorted to a number of other unpopular measures. Among them is the notorious introduction of passporting for buying of the hard currency and stiffening of requirements to reservation of currency deposits. The latter rule is supposed to provoke falling of interest rates on foreign currency deposits and stir people’s interest in hryvnya savings. At the same time the NBU and the government tried to con people to get rid of the dollars, offering them sovereign bonds issued in foreign currencies. However, judging by official data that did not influence the level of dollarization of Ukrainian economy much, because for the last 4 years it has been fluctuating at the level of 30%.
We cannot stand it any more
Collapse of hryvnya, which devaluated by 60% during the time of the economic crisis, made the NBU freeze quotations of Ukrainian currency permanently. For the last 2 years the hryvnya/dollar exchange rate almost did not leave the corridor of 8 – 8.05.
2008 crisis made the government and the NBU restrain inflation by all means. However, withdrawal of hryvnya from the market subject to such objective create a new problem – crediting for economy was cut. Pulling deficit hryvnya at exorbitant rates, bankers simultaneously inflated prices on loans. Enterprises could not afford credits at 23 – 25% annual interest. Pressure for money has already started to slow down the rates of economic development. In the 1st quarter the GDP increased in comparison to the same period in 2011 by 2%, but in comparison to the 4th quarter in 2011 it fell by 0.2%.
Some financial experts believe that current NBU policy may repeatedly provoke collapse of the currency exchange rate similar to devaluation in 2008.
We are losing it
Ukrainian economy’s Achilles» hill is its rough dependency on external markets. In 2009 Ukrainian industrial production was cut almost 22% and GDP declined by almost 15%, which was a record for the last 15 years, because of the global crisis and falling demand for Ukrainian steel. The reason is obvious: our country produces next to no finished products with high added value competitive in both domestic and foreign markets. In pre-crisis years the lion’s share of our export belonged to raw materials and agricultural products – steel, metals, chemicals and grains. But after the crisis the situation did not change. In 2011 the rate of raw materials with low converting rates in Ukrainian export was raised to 86%.
Escalation of European crisis and falling demand for Ukrainian export may repeatedly knock out our economy. Metallurgical markets are already sinking weakening the inflow of foreign currency to Ukraine.
The deficit of foreign trade in January – May 2012 was US $6 bn as compared to US $2.91 bn according to the results of the 1st quarter, reported the State Customs Service. The SSC calculated that since the beginning of the year the deficit of the operating account has been US $2.6 bn (4% GDP). «Operating account balance now repeats dynamics of the pre-crisis 2008. For now there are no factors which would be able to stabilize the state of the balance of payments,» noted director for economic programs at the Razumkov Center Vasyl Yurchyshyn. In short-term prospect smooth devaluation of hryvnya (within the limit of 10%) could increase price competitiveness of Ukrainian goods in foreign markets.
We cannot stand the thrift
The crisis made our government thrifty. Deficit of the national budget in 2011 was reduced in comparison to 2010 by 2.7 times – up to UAH 23.554 bn (1.7% GDP). And in 2012 for the first time over the years the national budget was approved with a special amendment allowing the government to correct amount of social payments during the year «in compliance with funds provided by the national and the pension fund». Unwillingness to splash money was consequence of not only the officials» benevolent intentions to lead the country away from collapse but common absence of funds. Acute shortage of liquidity in the banking system limited the appetites of the Finance Ministry for borrowings in domestic market. At the same time escalation of the debt crisis in Europe made foreign loans unobtainable for Ukraine.
However, the upcoming parliamentary elections make our government forget the crisis lessons. In April the Rada passed amendments to the national budget with regard to the president’s initiatives. Consequences of such step were notable right away. «By all appearances, rates of spending spree speeded in May after amendments to the national budget 2012 were passed and increased expenditure by UAH 33 bn (2.3% GDP). We believe such step will add approximately UAH 2 to the current rate of expenses in May and UAH 5.5 bn monthly in June – September,» forecasts chief economist at Dragon Capital. As a result the extreme deficit of the national budget may exceed the expected level of 1.8% GDP. «The government will succeed if it is able to bring the deficit level to 3.5%. However, it will be hard to do without hiking gas prices,» supposes Executive Director at the Bleyzer Foundation Oleh Ustenko.