Investor confidence in 01 2012 hits new low

Investor trust in the Ukrainian market dipped by 0,01 points in Qi 2012, following an unprecedented drop at the end of 2011. EBA Investment Attractiveness Index is now at a mere 2.18 points. The grim outlook is the result of persistent problems, such as administrative pressure, corruption and red tape, ailing taxation and customs practices, coupled with renewed concerns over Ukraine’s political strategies and relationship with the European Union.

The European Business Association has released the most recent data from the EBA Investment Attractiveness Index, a unique barometer of investor sentiment and the perception of Ukraine’s business climate. This time around, 149 CEOs from EBA member companies contributed to the survey.

The graph below plots the ups and downs of the EBA Investment Attractiveness Index, starting from Q3 2008. The alarming plunge in investor confidence that started from Q3 last year is clearly continuing, with the index hitting a new record low of 2.18 points last quarter.

Methodology of the EBA Investment Attractiveness Index:

Measured on a one-to-five scale, the investment climate assessment is made on the basis of three factors:

• current investment climate evaluation: This received the lowest mark (1.7) and was down compared to the previous survey (1.8);

• changes to the business climate during the last three months were rated at 2.2, showing no change;

• further predictions and expectations of the investment climate were 2.3 on average.

When asked about positive and negative trends seen in the Ukrainian economy in Qi of 2012, 77% of those surveyed failed to name any positive changes at all.

At the same time, when commenting on the negative changes and concerns that are behind the brewing investor discontent, the respondents had a great deal more to say. The chart below displays the scope of investors’ concerns.

26% of those surveyed see the country’s political developments as chilling the investment climate of our country. The controversial imprisonment of the former prime minister, Yulia Tymoshenko, which has soured the EU-Ukraine relationship and delayed the initialling of the Ukraine-EU Association Agreement, along with tense talks with Russia over the price Ukraine pays for gas imports, are top of the list of concerns for businessmen worried about Ukraine’s political and economic state, both present and future.

25% of those surveyed face serious problems with taxation and the new Tax Code of Ukraine -18% reported an increase in pressure from the state authorities and the overregula-tion of business activities. Destructive corruption (15%), the poor legal framework for doing business (11%) and an unjust court system (5%) are still among the business community’s chief concerns. Barriers to the export trade in the form of customs clearance obstacles and VAT refunds were reported as troublesome by 13% and 7% of the respondents respectively. Meanwhile, 5% of those who contributed to the poll said the banks crisis and restricted access to loans and credits had presented fresh problems.

When commenting on double dip recession expectations, 58% of the respondents said a further economic slowdown was either a certainty, or probable. This was more optimistic compared to the last quarter’s results (69%), but the outlook is still a good deal more cloudy than bright.

Tomas Fiala

EBA President, CEO of Dragon Capital

The latest reading of the EBA Investment Attractiveness Index disappointed again, hitting a new all time low. The last time domestic businessmen felt so pessimistic was at the end of 2008 and the beginning of 2009, foreshadowing a 15% plunge in GDP. And while we currently see absolutely no preconditions for another sharp contraction like this, I must say that the government equally faces an uphill task achieving its GDP growth target of 3.9% set for this year. Dragon Capital’s economic analyst, for example, projects much more modest growth of 2.2%. But what gives us some comfort is that the government realizes how formidable the challenges are and what has to be done to restore Ukraine’s investment attractiveness.

Three weeks ago Prime Minister Mykola Azarov met with close to 20 largest foreign strategic investors in Ukraine to collect their recommendations on improving the investment climate. It was a very frank and straightforward two-hour discussion. We were further encouraged by Mr. Azarov’s speech at the weekly government meeting on the following day as almost half of his address was devoted to the issues discussed at our meeting and relevant ministries received instructions to act on the problems raised. The most urgent tasks include improving protection of creditors’ rights (currently the major hurdle for banks to accelerate lending), curbing transfer pricing (a bill is being drafted to protect investors in local export companies), further deregulating the construction sector, streamlining tax legislation and developing the stock market.

We hope the words will be converted into deeds quickly and we will be able to report progress on the aforementioned issues to Mr. Azarov in May.

Hans Bestman

Country Manager, BASF SE

When rowing a boat with a group of people an aligned approach is needed to go with a steady speed in the right direction. As soon as the paddling is not aligned anymore the boat will lay still on the water or turn in a circle, but for sure not moving straight forward to the target.

Within the EBA 7 key topics are defined on which we want to realize an aligned view with the authorities in order to create a good economical environment for building up a flourishing business. The EBA is discussing these key topics already for several years but the big break through is still absent. There is no movement forward and that is reflected by the business community resulting in a low number of the EBA Investment Attractiveness Index.

The amount of money a company can invest is limited and will therefore be invested in those emerging markets where there will be the lowest risk and the highest return on investment. If Ukraine wants to attract investments from abroad the government has to create a healthy investment climate which is not the case today. Some statements of political leaders give me the impression that they belief everything is good in Ukraine and therefore companies should stop complaining. The opinion of the EBA members is the opposite. Nevertheless we should not give up but keep on going for the improvements. By the way, if you really want to be successful being good is not enough. You have to be great!

Anna Derevyanko

EBA Executive Director

Regarding the results of the fifteenth wave of the Investment Attractiveness Index, I can hardly say the figure of 2.18 was a surprising one. It’s news to no one that with a little more than half a year left before parliamentary elections, the attention of business people is glued to the steps the Ukrainian government is taking to improve the sentiment of investors and gain the business community’s support. The same old challenges are still on the agenda - the fight against corruption and red tape, the establishment of the rule of law, longed-for deregulation, corruption and red tape, poor legal framework, overregulation and administrative pressure, taxation and customs inconsistencies and so on. However, and you can hardly imagine all these problems being solved quickly, in a quarter or half a year, and the latest results of the EBA Investment Attractiveness Index back that up vividly.

On the other hand, time is precious, and action is needed. Taking in view the overall picture painted by the results of Index, the European Business Association is re-kitting its policy toolbox and is switching to a simple strategy — seven measures that can easily be put into practice. Excellence is found in the details - when small problems are solved it is easier to focus on long-term strategies and fundamental concerns.

Importantly, the EBA will exploit its full potential to push its ambitious agenda in every policy area. Among the issues par excellence are:

1. Recognition of EU CE labelling

2. Harmonisation of product labelling guidelines with EU regulations

3. VAT refunds

4. Full-scope implementation of an e-declaration system by customs

5. Efficient use of the transit potential of the country

6. Settled tax losses carryforward

7. Transfer pricing regulation