print 22.05.2002

Credit-Rating: Ukraine for 10 Years of Independence - a macroeconomic report (prepared for EBRD shareholders meeting in Bucharest)

Ukraine after 10 years of independence The Soviet inheritance. Stages of recovery In the beginning of the 90s Ukraine became independent. Change of the political set up and democratization of the society brought in new opportunities for formation of free market economy. Along with all post-Soviet countries Ukraine went through severe economical crisis. Creation of a new economical system was complicated by the problems inherited from the Soviet era in the sphere of military-industrial complex, energy and metallurgical industries and consequences of the Chernobyl??s catastrophe. Consumer-oriented industries that normally generate millions of jobs and create thousands of business enterprises - light and food-processing industry, services sector - were not enough developed in Ukraine at the time. Transformation of the economy of Ukraine during the years of independence has gone through several stages. 1991-1994 Period of liberalization accompanied by prompt slump in production levels. The process was characterized by weak resistance to crisis factors brought in by swift transformation of the economy. Positive effects of liberalization were seen in commencing of the property privatization process, deregulation of the economy, free business and trade, including foreign trade. On the other hand, there were also negative effects like growing inflation and unemployment, decrease in production volumes and living standards of the population. Gross domestic product (GDP) in 1994 constituted only 60% from GDP of the year 1991. 1995-1998 Period of active counter-action to the crisis and restraint of economic recession. Basic elements of free market infrastructure were set up at the time: bank, tax, customs, stock market regulations and systems were created and perfected privatization and de-monopolization of enterprises in the most important branches of industry was effected; competitive environment was generally created interference of the state in the economy was gradually lowered; state regulatory effects on the economy were adjusted 1999-2001 From the second half of 1999 the process of stabilization and gradual revival of the economy has started. The economic policy of the government was aimed at stimulation of domestic manufacturers - exporters. Priorities were set on fulfilling social obligations to the population and obligations to foreign creditors. During all the twelve months of 2000, for the first time in the years of independence, steady growth was recorded in GDP, industrial production and real incomes of the population. The greatest increase of production (at the level of 26-39%) was seen in light, food-processing, wood-processing and paper industry. Growing demand at external markets stimulated increase of production in export-oriented industries - black and nonferrous metallurgy, mechanical engineering and metal processing, chemical and petrochemical industry. The highest results were reached in 2001. The rate of economical growth accelerated to 9.1%. The level of inflation stayed within 6.1% - the lowest for the last 10 years. Financial stabilization created favorable conditions for renewal of the investment potential, growth of real incomes of the population and further development of the economy. Industry As of today, the Ukrainian industry preserves strong industrial potential and developed infrastructure. Favorable conditions for further development are created by excellent geographical position of the country, abundant reserves of mineral resources, raw materials, arable land and labor force. The slump in production levels of 1991-1994 caused structural deformation of the Ukrainian industrial complex. The share of light and food-processing industries in overall volumes of industrial production fell more than twofold. The share of mechanical engineering (essential for technical development of other industries) decreased by 1.6 times. At the time vertically oriented industrial policy was in place with the mission to provide support to separate industries by the means of significant government investments. In 1995-1998 the structural deformation processes were generally slowed. However, it is still highly important to overcome the tendency of the recent years that commands production of raw materials and semi-finished products rather than final products. Actual positive signals came in 2000: For the first time in several years, an increase of production volumes in mechanical engineering and metal processing was recorded (16.8% higher compared to 1999 figures), however the proportion of these industries?? products continued to decrease in the whole industrial production volume (14.1% in 1999 and 13.2% in 2000) Production of consumer goods increased by 24.5% in comparison to the previous year. In 2000 there was a positive trend of monthly decrease by 0.4-1.2% of the share of resource-consuming industries (power generation, fuel energy, metallurgical, chemical and petrochemical industry). The share of food-processing industry has risen in 2000 from 15.1% in 1999 up to 17.4% The share of cash payments (as opposite to barter) in the structure of settlements increased from 49.1% in 1999 to 69.2% in 2000 Export of machines, equipment and machines, electro-technical, audio and video equipment rose by 48.2% as compared to 1999 with the share of these products increasing by 1.4% in the total export volume Privatization and restructuring of industrial enterprises are important factors in the process of their integration to market environment. Restructuring includes measures that provide for change of production structure, transfer of objects of social infrastructure to municipal bodies, sale of excessive machinery and buildings, restructuring of debts. Current Ukrainian industrial policy provides for measures aimed to attract investments in low resource-consuming industrial sectors with domestic as well as export orientation. The volume of investments made in fixed assets has started to increase from 1998. The major part of the investments comes from national investors, mainly manufacturing companies. Up to 70% of investments are made on the account of own funds of the companies. Agricultural sector Agricultural sector possesses around 25% of total production assets and employs around 20% of the country??s labor force. Agricultural sector also utilizes the main wealth of Ukraine - 42 million hectares of excellent arable land. The basic components of agricultural reform that started in the 90s were determined with consideration of necessity of consistent large-scale introduction of market relations. The key components of the reforms are as follows: land reform aimed to increase effectiveness of the land utilization and competition reforming of agricultural enterprises to provide for protection of interests of property and land owners creation of the agricultural market infrastructure and system of economic regulation of agricultural production to ensure its competitiveness in free market economy The first stage of the agricultural reform was completed in 2000 when as much as 99.7% of agricultural entities were reformed. 6,5 million of Ukrainians received property certificates on land lots. As of today, in Ukraine there are 41,600 farms utilizing over 2.6 million hectares of arable land. New private owners demanded support from the state, since 84% of agricultural enterprises were reporting losses in 1999. The support was granted in the form of laws and government resolutions related to writing off outstanding tax debts, restructuring of debts for electric power, collection and use of VAT, reimbursement of losses to agricultural producers who suffered diverse acts of nature. The new Land Code adopted in 2001 provides solutions to most of the problems previously experienced in utilization of land, determines property rights for land, creates identical conditions for activities of domestic and foreign investors. During the years of independence the centralized system for planned economy and for wholesale food distribution was abolished in Ukraine. New intermediary trading enterprises appeared on the market in efforts to set up a new effective system of delivering agricultural products to the final consumer. As of the end of 2001 in Ukraine there were 35 accredited commodity exchanges, 380 agricultural trade houses, over 21,000 specialized warehousing facilities. The basic principal element of regulation of the agricultural sector is ensuring transparency of the grain market and developing the system of grain purchase under collateral. The system of provision of agricultural producers with financial resources was improved. New credit facilities were developed for agricultural enterprises. Special funds from the state budget were used to provide partial indemnification to commercial banks lending funds to agricultural enterprises at lower interest rates. The next step aimed to improve financial and credit service will be creation of a credit support fund for agricultural producers, specialized land bank and introduction of the system of investments protection. In 2000 for all categories of agricultural enterprises gross output increased by 9.2% as compared to 1999. The best results were achieved in private sector with gross output increasing by 19.8%. This figure proves availability of prospects for development for farms and other enterprising structures in agricultural sector. Small businesses In 1999-2000 regional programs for support of small businesses were introduced in all regions of Ukraine. These programs are supposed to fulfill the following needs of particular regions: creation of infrastructure for informational and consulting support of businesses; provision of free access to legal, economic, marketing, scientific and technical information for setting up and operation of small enterprises; creation of tools enabling businesses to receive credit and intermediary assistance in relations with investment funds; provision of support to small businesses by granting assistance in obtaining production facilities, municipal property and land lots for rent. As of today, around 3 million people are employed by small businesses in Ukraine that constitutes 9.5% of total labor force. Business infrastructure network is constantly growing. There are over 400 stock and commodity exchanges, 655 investment and innovation companies and funds, 86 regional funds for business support, 319 insurance companies, over 1,800 auditing companies and private auditors, 146 business centers, 73 leasing companies, 53 "business-incubators". The main legislative document that regulates business relations in Ukraine is the law "On Business Enterprises". There is also a number of other laws stimulating business development. Among them are the following laws: "On Auditing Activity", "On farms ", "On Securities and Stock Exchange ", "On Commodity Exchange" and many others. Such institutions as Ukrainian Fund for support of business enterprises and Ukrainian Fund for support of farms operate at the highest state level. The law of Ukraine "On Foreign Investment Regulations" grants identical rights and imposes identical obligations to foreign and domestic enterprises on the territory of Ukraine. The state guarantees protection of foreign investments. The government considers it important to actively attract foreign investors into the national economy as they would invest not only money and modern equipment but also the newest technologies, progressive management practices and access to new markets. Creation of a favorable investment climate is constantly in focus of the economical policy. Foreign trade Successful integration of Ukraine into the international community will open new opportunities for development of foreign trade and other forms of economic co-operation. One of the essential steps in this direction is acceleration of entering the World Trade Organization. The government has passed a number of rulings related to minimization of discrepancies with generally accepted international standards, bringing foreign trade tariffs in conformity with requirements of GATT/WTO and increase of foreign trade turnover with the European Union countries. Elimination of Ukraine from the list of emerging markets within the framework of antidumping investigations provides for usage of more adequate approaches in settlements of antidumping investigations against Ukraine, promotes growth of export potential and increase of production volumes. On the other hand, the important task in the sphere of the external economic policy is improvement of trade and economic relations with the CIS and Baltic countries, that provides for continuation of long-term economic co-operation programs, creation of organizational and legal grounds for setting up free trade zones, further deepening of economic relations within GUUAM. Foreign trade volumes are getting back to the levels obtained before the crisis period of 1998-1999 due to continuing favorable situation in the world markets for traditional goods of the Ukrainian exports, increase of production volumes in export-oriented industries, governmental measures aimed to support position of Ukrainian exporters in the foreign markets. The government also implements policy aimed to protect Ukrainian producers in the domestic market, including tariff and non-tariff regulations and execution of antidumping legislation. The increase of external trade turnover is characterized by the level of exports growing faster than that of imports. The structure of export is also improving - the share of hi-tech export products with higher added value increases. Maintenance of the positive balance in foreign trade of products and services, originally stemming from the increased demand in foreign markets, provides for higher level of GDP growth now and creates conditions for steady economic development in the future. A powerful engine of economic development is expansion of domestic demand, first of all, due to growth of incomes of the population. In addition to economical effects, increasing living standards conduct a significant social function. The state policy aimed to gradually increase the level of real incomes of the population started in 1999 and allowed to obtain higher level of proposition of goods and services from national producers as well as to reduce social pressure in the society. Moving ahead The way the reforms were conducted in Ukraine allowed to achieve significant positive results already in 2000. Efforts of the government directed at capitalizing on those achievements in 2001 created conditions for their successful maintenance and improving their tendencies. As of today Ukraine holds one of the top places among countries of the CIS on growth rate of GDP and industrial production. Achievements of Ukraine in the sphere of transformation to free market economy in the last two years have been favorable noticed by foreign experts that have risen their estimations of economical and investment attractiveness of the Ukrainian market. Investment risks in Ukraine have been re-evaluated. Based on the progress achieved by Ukraine in microeconomic and financial stabilization as well as in relationships with international financial organizations, international rating agencies have started raising credit ratings of Ukraine in 2001. Moody??s changed credit rating of the Ukrainian bonds from Caa3 to Caa1 in November 2001 and further to B2 in the beginning of 2002. Standard & Poor??s raised short-term rating of the Ukrainian government bonds nominated in domestic and foreign currency to B and long-term rating to B(St) in December of 2001 which is the highest credit rating for the years of independence. Japan Rating & Investment Information agency raised the Ukrainian rating from CCC+ to B-. According to JP Morgan Bank data, in 2001 Ukraine occupied the top position in the list of the most attractive investment markets as it provided 57.1% return on the investments.