Investor mood plummets

Ukraine’s investment attractiveness index has dropped by another 0.2 points, reaching just 2.12 out of a possible score of 5 over the fourth quarter of 2012. Let us recall that the index has been calculated by the EBA since the third quarter of 2008 and is based on the survey of the association member companies’ managers. The index is now the lowest since the survey began!

“2012 was a very tough year,” the EBA’s Executive Director Anna Derevianko said when reporting the results of surveying association membership’s investment sentiment. She explained that the index’s fall over the last three months of the year had been affected by increasing tax pressure, exchange rate fluctuations and the National Bank of Ukraine (NBU)’s exchange rate policy, election-related political complications, corruption, a weak judiciary, low purchasing power of the population, and a constantly changing legislation. The business community saw the language law as a negative factor, too, as it requires mandatory labeling of goods in regional languages.

The EBA’s members highlighted following positive changes in the investment climate: legislative settlement of the previous years’ losses transfer problem, abolition of the mandatory conformity declarations, abolition of the mandatory registration of foreign trade contracts with the Agrarian Exchange, the amendments to the Land Code which settled the question of foreign investors’ right to buy non-agricultural land, coming into effect of the new Customs Code, and the introduction of the automatic VAT refund.

The EBA did not expect any major improvement of the country’s investment climate to happen over the next two quarters. They noted, though, that the economic situation in general should improve. The association’s president, CEO of the investment company Dragon Capital Tomas Fiala told The Day that he expected the growth to restart in the second half of 2013, reaching 2 to 2.5 percent over the whole of 2013. He saw agriculture, growing by 4.8 percent in 2012 and projected to grow by 3 percent in 2013, and manufacturing, expected to add 3 percent in 2013, too, as the main drivers of the recovery, while construction sector would grow stronger, too. There could be some improvements in the credit situation. “Everything will depend on the success of the fight against devaluation expectations of the population and businesses. Should these expectations be overcome, allowing the NBU to liberalize its monetary policy, we will see cheaper credit. Should the fight continue unabated, as it did over the past 14 months, the bank loans will remain as expensive as they are now,” Fiala continued. The issue of the cheap bank credit as well as the overall rate of economic growth could be affected by the resumption of Ukraine’s cooperation with the IMF, he concluded.

Should Ukraine join one or another economic union, it will strongly affect investor sentiment and the inbound investment flows. “Business likes clarity on the integration direction,” was Derevianko’s summary of the situation. Fiala said the business community’s view was that the benefits of joining the Customs Union (CU) could only be short-lived, in the form of lower natural gas prices. He clarified that the Belarusian example had showed that the preferential price of gas would be in effect for a maximum of three years. “But the long-term positive effects will be absent, should Ukraine join the CU,” Fiala said. Ukraine’s accession to a free trade area with the EU is a completely different matter. Firstly, the Ukrainian market participants would then obtain access to one of the largest markets in the world, which is eight times larger than the CU market. Secondly, he said, the progress towards the EU was a guarantee of an accelerated economic development of a country. Experience of the Central European nations, such as Poland, Hungary, and Slovakia, has shown that these countries have grown faster, even without Russia’s raw material resources.