Экономические науки/3.Финансовые отношения

Kirpichnikova O.V.

Donetsk National University of Economy and Trade

After-effects of global financial hurricane in Ukraine

With inflation still running at one of the highest rates in Europe and the Kyiv housing market sliding, a mixture of simple time deposits, agriculture land and selectively purchased Ukrainian equity would provide the right blend of security and potential upside.

There are different channels of influence, deeply-felt by the Ukrainian economy.

The first channel is foreign trade. Widespread financial problems have already undermined demand in the international markets. Recession in the world’s leading economies will be accompanied by the decreasing investment demand and poorer dynamics of construction. This, in turn, will continue to drive down prices for metallurgy and machine building products.

The second channel is the banking system. The penetration of foreign capital into Ukraine’s financial institutions is considerable. The financial sector is one of the national leaders in attracting foreign direct investments (19% of total accumulated foreign capital). The share of foreign capital in the banking sector amounts to 37.2% of total capital, which exceeds the threshold of economic security established at 30%; in the insurance sector it approaches the threshold value, currently constituting 28.1%.

Ukrainian banks are currently offering double-digit returns on one-year time deposits, some of the best rates in the world for current accounts. Picking a large bank backed by a foreign parent is probably the best choice. The additional 1-3 percent return smaller banks offer doesn’t compensate for the risk of those banks falling over if credit markets continue to tighten.

Ukrainian agriculture also has a bright future. Following the collapse of the U.S.S.R., the sector fell into decline but the potential for a return to former glories, this time with investors benefitting from profits, is stronger than at any time in the recent past. A combination of investment, consolidation, modernization and legal reform that will unlock the vast market potential of Ukrainian agriculture looks a relatively safe bet. The biggest problem with investing in agricultural land is the very tricky legislation that goes with purchasing land.

Investing in Ukrainian agricultural stocks gives the investor the best of both worlds by providing access to the sector as well as a clear exit. Overall, with stocks beaten down, investing in the sector now is inexpensive. Our top agriculture pick is the London Stock Exchange-listed Myronivsky Hliboproduct, also known as MHP. Known as a poultry company, it is Ukraine’s largest agricultural producer. Its also the first sizeable Ukrainian agriculture holding to be listed outside Ukraine. The backbone of the Ukrainian economy is steel and its associated industries, most notably coke producers, coal and iron ore mines. Although fluctuating global steel prices impact these industries and the Ukrainian economy significantly, ultimately companies in these sectors should be a priority for stock investors looking at Ukraine, especially with the market as heavily oversold as it is now.

Investors would be well advised to give real estate a wide berth for the time being. Pessimism about real estate is rife all over the world, but Ukraine’s real estate market was seriously overheated even by the standards of excesses elsewhere.

Standalone banks reliant on international borrowing will be hardest hit. This comes on top of a legacy of loose credit policies of several banks and overarching global pessimism. It would not be a surprise to see some streamlining of the banking sector, although with 150 banks operating in Ukraine that may be welcome. Turning to currency, the hryvnia has depreciated suddenly against the dollar. This was perhaps influenced significantly by Naftogaz, Ukraine’s state oil and gas company, buying dollars to pay for Russian gas.

We may see a drop to a 4.90-5.00 range in the 6-9 month horizon as that selling pressure lessens, moving back towards Hr 5.0, or a little higher, in nine to 12 months as the current account deficit weights on the hryvnia. Any continuing deterioration is steel prices will increase the current account deficit further, meaning a knock-on effect for the hryvnia.

Given the limited financial resources inside the country and shrinking access to foreign loans, businesses face a difficult choice: either to suspend production and lose markets, maintaining high prices in expectation of better times, or to reduce prices trying to restore demand and keep consumers. The latter option is for those manufacturers who care about their future, expansion and economy of scale; the former is for profiteers who make large money quickly and drop the production.

The government can undertake to hold consultations aiming to sign memoranda with investors and large businesses on reducing prices for goods and services.

Only the concerted efforts of the government and National Bank, supported by Parliament and the business community will enable the Ukrainian economy to pass the maturity test in times of global financial crisis.