2008

CRISIS HAPPENED

Recently the IMF approved a $16.5 bn loan program for Ukraine under the two-year loan agreement. The program for Ukraine will try to restore financial and economic stability through a more flexible exchange rate regime with targeted interventions, recapitalisation of banks, tighter monetary policy. The IMF support for Ukraine means more guarantees for the financial sector, but meantime much less protectionism opportunities for support of basic industries. With big role of the export targeted industries, the IMF proposed measures can prove to be insufficient to recover the economy growth. Ukrainian banks will remain mostly stable, and the bank run is not a threat in a short term. At the same time the banks’ role as investments distributors will ultimately decrease while real capitalisation of banks will decrease as well. The most troubling period for Ukrainian banking sector will be mid 2009, when they will have to pay around $3bn of foreign debts, without opportunity to borrow more from external markets. Anyway, the NBU actions can be considered as correct only as short-term survival tactics, which does not deal with renewing the role of banks as significant investors. Current investment problem of Ukraine is over-investing in industries with crisis problems now (finance, construction and real estate) and not sufficient investing into the export oriented industries (like metallurgy), which does not allow to manage with world prices decrease, keeping costs low. Yet another problem is under-investing into domestic mass consumer markets. Today most of companies cut off their investment plans. That will hit economy soon through the multiplier effect. The main problems of Ukrainian foreign trade are excessive imports, caused with overheated domestic demand, and not diversified exports. Because of less variety of export industries, there are risks of closures down in the export targeted sectors (metallurgy, chemical production etc.). In 2008 high inflation was mainly caused by excessive population spending, which finally stopped in autumn. Then devaluation played its role to accelerate inflation, mainly with higher prices for imported goods. The binding factor for inflation will be less population spending caused by change of spending and saving attitudes and by growing unemployment. The real threat is multiplier effect, with recession spreading from an industry to an industry and from a region to a region. Alas, government still has not undertaken anything serious to prevent it: anti-crisis law and other actions were mainly targeted to satisfy requests the IMF or to reach short-term goals and did not consider the economy problems at full scale.