Will we become rich in 2004?
A PLANNED PREGNANCY
Valery LYTVYTSKY, aide to the NBU governor:
“The preliminary macroeconomic results are already known and are quite instructive. The main conclusion is that this year the Ukrainian economy was impregnated by 10% growth. The delivery is planned for the next year and will be successful if we maintain our financial and currency stability, if this year’s external demand for domestic products and services stays unchanged, and if we grow and gather an adequate crop (average for the years 2000-2002). We will get 7-8% as a result of inertial growth, that is, owing to old capacities, investment, and buildup from the structural reforms of the previous years. The remaining three percent depend on external, seasonal, and political factors, which understandably could change.
“As for the outgoing year, while the pace was quite rapid with the GDP growth rate at nearly 8%, the quality of movement is still too low. This is primarily due to rather high inflation, which, figuratively speaking, is on its knees but still struggling. It is fed by the imbalance on the goods market, tariff policy, and certain negative expectations of producers and consumers. We have concluded that the price increases of the outgoing year are a quite acceptable price we are paying for twice the expected GDP growth. It is noteworthy that there are no macroeconomic reasons in Ukraine for inflation, which does not depend on political, seasonal, and administrative factors. Thus it is close to European standards of 2 to 3%. The quality of economic growth has also been influenced by the gap between the investment boom and quite moderate growth of real incomes of the population and the gap between an industrial upturn and the crisis in the agricultural sector. The situation was further aggravated by inefficient management of the foods market in general and the grain market in particular. However, an analysis of the causes of inflation suggests that almost a quarter of the inflation rate is due to the economic performance that is nearing a record high. Unemployment fell slightly (by 5% from November 2002), and, according to theory and practice, this also entails price increases.
“Incidentally, the exchange rate of the hryvnia that was established after the crisis and devaluation of 1998- 1999 still contains the potential that stimulates export of goods and services. Simultaneously, the real devaluation of the euro to the dollar increased the trade potential of Europe, while the real devaluation of the dollar to the ruble increased Russia’s role in our exports. However, imports from Europe are becoming more expensive, and this somewhat increases inflation in Ukraine, since it negatively affects the trade balance.
“However, macroeconomists believe one should not overly dramatize this year’s consumer price increases. It is important that they did not prevent real incomes from growing. In November and January (the months with the highest inflation) alone they rose by 3 and 7% respectively, while real wages and salaries were up 15% (twice GDP growth). Moreover, the inflation rate was lower than the growth rate of all social incomes. In particular, the incomes of enterprises have grown significantly, which ensured a 32.5% increase in investment demand and will eventually boost real incomes of the population in 2004 and subsequent years. It will be recalled that in 2002 real incomes increased at a rate four times that of GDP growth. This was not good for the economy, in which everything must be balanced. In 2003 these indicators increased, so to speak, hand in hand, which is good not only for the short but also the long term.
“On the whole, my forecast is that provided the external demand remains at the 2003 level and the growth rate of the incomes of the population (consumer demand) increases by one and a half times from this year, and if the harvest is good, Ukraine’s economy will grow at the rate of 9-12% in 2004 (this despite the high basis of comparison in 2003). If external demand declines and Ukraine’s agriculture faces similar problems as in 2003, the potential GDP growth rate, by my estimates, will be 6-7%. This is also a very high rate.
“We took a bad fall into a deep pit of crisis. We can not only climb out of it but virtually jump out of it. This is one of the main lessons of the outgoing year.”
NOT THE BEST TIMES FOR BUSINESS
Yaroslav ZHALILO, president, Anti-crisis Research Center:
“The main feature of 2003 for Ukraine was the renewal of an export-oriented model of economic growth. The improving foreign economic situation boosted exports, which became a determinant of economic dynamics and fostered the remonetization of our economy, boosted budget revenues, and heightened investment processes. The latter are the second main feature of the year and can be viewed as a major strategic factor of further development. Simultaneously, I have to admit that, although the economy in general succeeded in 2003, the government failed to make full use of the positive trends and dragged its feet on major changes, which should have accelerated the transition to an investment-innovation model of development, such as reforming the taxation of enterprises, creating institutions of long-term credit, developing an innovation infrastructure, and so forth. The fiscal pressure intensified, and the budgetary policy on the whole inhibited business development.
“My forecast for the new year is as follows. In the first six months we should expect budget problems connected with the transition to the new flat tax for individuals. This and the fact hat the National Bank is planning anti-inflation measures will slow economic growth. Therefore, the foreign economic situation will remain crucial. If it stays unchanged the slow down will be negligible.
“Known political factors will lead to increased social disbursements in the second half of 2004, which is expected to revive consumer demand and economic dynamics in general. Simultaneously, a rigid fiscal policy will remain in place, thus limiting the development of domestic business and threatening to worsen the foreign trade balance. Thus in 2004, business will be in for some tough times.”
ON THE THRESHOLD OF A CONSTRUCTION BOOM
Valery MOSHENSKY, chairman of the supervisory board, Planeta-Bud Company:
“Our diversified company end ed last year very successfully, doubling its turnover from 2002. Further evidence of the positive results is the fact that we have developed to incorporate a group of companies. Our print factory has been put into operation in Rivne. Construction of a printing inks plant, the first and only such enterprise in Ukraine, has begun. A modern bridge-building company has been created. It is operating equipment that is unique in Ukraine. We have developed the know-how to build new Kyiv bridges, and our company will participate in this project. Among our projects completed is a major renovation of the Transport Ministry building and a new railway station in Novhorod-Siversk. We have also won a tender and are now renovating another major building, the office of the Kyivstar Company. We have also won a subcontracting job to build Aerorukh [Ukrainian Air Navigation Service] offices in the Boryspil Airport, and construction is also underway there.
“As for the next year, I can say that Ukraine is in for a construction boom, evidence of which is our doubled turnover. There are other signs: the builders are running short of steelwork, crushed stone, and cement. Thus this year’s 20% increase in industrial output can translate into a quite natural construction boom next year. The situation benefits from competition that has developed in the construction sector. This primarily influences the quality of services. However, in Kyiv, which is in fact dominated by one company, Holovkyivmiskbud, this is not as visible as, say, in the Crimea, where the construction boom is already on the go. But there is hope that next year power in the capital will change hands, and against the backdrop of increasing competition Kyiv will expand as it should.”
FOR SALE!
Mykhailo CHECHETOV, State Property Fund chairman:
“The outgoing year was very successful for the privatization processes underway in Ukraine. Privatization has already brought UAH 2,010,000,000 (against the planned UAH 2,003,000,000). I look with optimism toward the prospects of the next year, although it will obviously be far from simple. Already in January we are planning to put into our coffers an amount that it would normally take us five months to collect. This will be the receipts from the sale of the Dzerzhynsky Metallurgical Plant. The investor appraised it at UAH 810 million, but I’m certain the expert appraisal will make this figure significantly higher. Then we hope to continue in the same vein. We have already announced a tender to sell Pavlohradvuhillia, with the asking price in excess of UAH 1.2 billion. The tender has been suspended by court decision, but we have already appealed the decision, and after the New Year we will do it. Moreover, next year’s privatization plan includes Kryvorizhstal, Ukrrudprom, and Ukrtatnafta. These are the key enterprises to be auctioned off in 2004. Ukrtelekom has not been taken off agenda either.
“Our tactic comes down to the fact that next year’s plan is doubly reliable. Despite the considerable political risks of the new year I expect the privatization plan to be not only fulfilled but also overfulfilled.”
THEY WILL BUY!
Oleksandr RIABCHENKO, Ph.D. in economics, director of the International Institute for Privatization, Property Management, and Investment:
“The major event in the economic realm in 2003 is the high GDP growth and high economic indicators unforeseen in numerous annual forecasts, which have been achieved largely owing to the nation’s economy. I don’t think that the state influenced these results significantly. In my view, in 2004, if the state also concentrates on strictly political issues and does not interfere in economic ones, the economy will be again able to achieve high results, the presidential elections notwithstanding.
“The privatization processes occur in a somewhat different way. There is stiff competition among financial groups. They compete not by means of bidding highest in a tender, but by means of influencing the preparation of tenders, their terms, and creating conditions under which tenders would be possible or impossible. The competition is formidable, yet it doesn’t affect the final price. Therefore, enterprises are put up for sale, and this channels money into the budget, the successful bidder notwithstanding. This money is enough to fulfill the plan envisioned in the budget. I believe the target amount will be achieved next year if we continue with our current approach. Moreover, we have already found procedural solutions to prevent suspensions of tenders in district courts, which has become popular in recent years. I believe the court ruling to suspend the privatization of the Pavlohradvuhillia Concern is not a continuation of the recent practice of blocking privatization. In this case the situation is different: financial groups have not settled some issues yet. The company will be sold en 2004. Similarly, several more major enterprises will be auctioned off, and their sales will bring some UAH 3 billion in budget revenues.”
