We’ll think of something. 10 economic risks fall

We’ll think of something. 10 economic risks fall

Focus found that threatens the economy and financial well-being of Ukrainians in the nearest future


In the early years it seemed that the bad times behind, Ukraine overcame the crisis and started a period of a slow but stable economic growth. This is evidenced by the rapid growth of air transport, tourism, housing construction and auto sales.

However, at the end of September of Ministry of economic development corrected the forecast on economic growth in a more pessimistic direction. Now the Ministry of economic development forecasts GDP growth in 2017 at the level of 1.8% with inflation on a yearly basis, December to December, 12.2% and an exchange rate of 27.9 UAH/USD. Four months ago the forecast was more optimistic: 1,9% GDP growth with inflation of 10.5%

Focus decided to analyze what factors can undermine the Ukrainian economy and, accordingly, more to empty the purses of the Ukrainians.

Risks assessed:

Anna Derevyanko, Executive Director European Business Association
Oleg Ustenko, Executive Director of the International Bleyzer Foundation
Elena Korobkova, the Executive Director of the National Association of Ukrainian banks
Paul Kuchta, Deputy head of the Strategic group of advisers to support reforms (SAGSUR)
Alex Amphitheater, Director of the rating Agency IBI-Rating
Yaroslav Chapko, head of the Supervisory Board of the architectural firm MA Group
Alexander Sokolov, Director General of Pro-Consulting
Maria Repko, Deputy Director of the Center for economic strategy
Dmitry Churin, head of the analytical Department at Eavex Capital
Andriy Yarmak, economist of the Department of technical cooperation food and agriculture organization of the United Nations (FAO)
Oleg Pendzin, expert Economic discussion club
Inna Zvyagintsevand, analyst, Adamant Capital
Vitaliy Shapran, member of Ukrainian society of financial analysts
Vladimir Dubrovsky, senior economist of “CASE Ukraine”
Oleksandr Savchenko, rector of the International Institute of business
Vladimir Landa, financial expert

As we thought

For the rating of economic risk , the Focus of invited experts on a scale to assess the likelihood of the ten main threats that will influence the situation in the Ukrainian economy until the end of 2017. Based on the data the editors brought the weighted average rating for each risk and put them in order from most important to less important. The evaluation was attended by representatives of leading Ukrainian and international investment companies, audit firms, rating agencies, business associations, financial institutions and research centers.

Risk 1. The pressure on business from the state

Consensus rating: 6,4

  • a new wave of emigration technology companies
  • care business into the shadows
  • the growth of corruption

Looks like tax reform, started by the deputies in early 2017, was a success — the level of shadow economy in the first quarter of this year decreased compared to the same period in 2016 by 6% to 37% of GDP. Such data are voiced in the Ministry of economic development and trade. In theory, this means that taxes put pressure on the business smaller, and reformed GFS finally leave entrepreneurs alone.

“According to our information and according to the latest results of tax index EVA, the pressure of the tax on business decreased significantly,” confirms Executive Director of the European Business Association Anna Derevyanko.

The only trouble is — instead of sneaks, the domestic business started to extrude the security Service. “Now the champion for the pressure on the business of the SBU. It complains the majority of Ukrainian businessmen. This issue was raised even at the meeting of businessmen with the President,” — said a senior economist of “CASE Ukraine” Vladimir Dubrovsky.

According to experts, the vague wording of the laws allow the security service to apply sanctions against undesirable companies for alleged use of special technical means or the financing of terrorism. It is often from such actions suffer not even individual companies and entire industries.

But on the prediction of the behavior of security forces in the run-up to the election campaign of expert opinion is radically divided. For example, Derevyanko believes that in this period the pressure on the business by different agencies, including the security forces, is increasing. And the expert Economic discussion club Oleg Pendzin sure that in an election year, the security forces, on the contrary, limit initiatives that worsen the situation in the business.

The risk 2. Toxic state

Consensus rating: 5,9

  • the budget deficit
  • the deterioration of the situation in the state
  • loss of interest from investors

The issue of privatization raised in the Ukraine permanently. Similarly, constantly, from year to year in the state budget are budgeted privatization receipts. Was no exception and 2017. According to government plans, this year, as in the past, from the sale of state property is planned to gain about 17 billion UAH. However, in 2016, the state property Fund sold assets worth about 331 million UAH, that is fulfilled the plan for privatization of only 1.9%. Despite the fact that this year from the sale lying dead weight of the blocking stake in power companies, the state property Fund has already helped more than 3 billion UAH, the sum obtained from the privatization of money is still far from planned.

“The government is doing with the state something that defies analysis. On most state-owned enterprises there is no normal corporate governance, where it is, go independent Directors,” explains the failures of the privatization attempts of state, Deputy Director of the Center for economic strategy Mary Repko.

The experts also draw attention to the lack of clear and transparent criteria for the preservation of those or other enterprises in the state. In the end, obscure the very purpose of their existence in the structure of the economy.

“State-owned enterprises — the main source of corruption in Ukraine at the moment — one of the major obstacles for reforms in the country”, — said the Deputy head of the Strategic group of advisers to support reforms (SAGSUR) Pavel Kukhta. — Ukraine is in dire need of a fast and the most large-scale privatization, otherwise, neither of which overcoming corruption and progress in reforming the economy to not speak”.

Risk 3. The cooling of relations with creditors and investors

Consensus rating: 5,8

  • the slowdown of reforms
  • the decline in investment
  • economic collapse

The placement of Eurobonds Ukraine $3 billion of 7.4% per annum with 15 years maturity reduced the country’s dependence on international lenders and allowed less sensitive to their requirements. This would not be anything wrong if the ultimate goal was the care of the national interest. But, apparently, would merely be the continuation of the moratorium on land sales, to postpone the privatisation, while strengthening covert monitoring of financial flows of state-owned enterprises. “Ukraine was able to interest the capital markets and to place Eurobonds. But at the same time, this weakens the incentive to accelerate reforms and to continue cooperation with the IMF,” — emphasizes the analyst, Adamant Capital Inna Zvyagintseva.

About the problems with the reforms Paul says Kuchta. However, he still hopes that they will overcome, as without international support, the country threatens to collapse.

“Ukraine will have to pay a large amount of foreign debts. In particular, almost $4 billion in 2018, then the same in 2019 then we will pay $5 billion annually by 2021. Ukraine has no such money. If you stop the cooperation with international financial institutions, it will lead to imbalance of the financial sector”, explains the Executive Director of the International Fund blazer Oleg Ustenko

If international organizations will not cooperate with us, you get a kind of vicious circle — the slow progress of reforms. We will not have an anti-corruption court, an independent NAB, which in turn will undermine the economic situation. In Ukraine stability and it will also cease to lay the Foundation for longterm economic growth. Lags from EU countries will only grow.

Risk 4. Inflation

Consensus rating: 5,7

  • overdue utility bills
  • the increase in spending on subsidies
  • the growth of social tension

According to state statistics, in 2016, the consumer price inflation was 12.4%. This year, according to a government forecast it would accelerate to 12.9%. In reality, however, prices likely will increase much more.

Contribute to the growth of inflation, the planned revision of tariffs for railway tickets, the devaluation of the hryvnia and the increase in import prices and the rise in energy.

The forecast financial expert Vladimir Landa, with an average inflation rate of 1.5–2% per month by the end of 2017, the growth of consumer prices will reach 14-16%.

“Inflation currently is moving above the established NBU trajectory, and there is a risk that the purpose of the Bank is achieved. The fact that the discount rate remains unchanged at 12.5%, underlines the willingness of the NBU to bring inflation to the desired trajectory”, — said the Executive Director of the National Association of banks of Ukraine Olena Korobkova.

The behavior of the national Bank draws the attention of the General Director of Ukrainian Association of trade networks suppliers Oleksiy Doroshenko. “The national Bank of Ukraine for the year claims a revision rate of inflation. If in may it was recognized that the cause of high inflation was the rise in the prices of all the food this time was provided by the leaders rise in price, namely — meat, dairy products, vegetables and cigarettes,” he explains.

At the same time Korobkova predicts that next year inflation is likely to return to the installed NBU trajectory. But the expert Economic discussion club Oleg Pendzin doubt it. “Next year is the year of populism and social benefits that will exceed the growth of the economy,” he says. Therefore, the impact of the increase in pensions will affect prices. According to him, the inflation within 7%, which the government has laid the draft budget 2018, it definitely is not. If its going to hold at 12%, it would be very nice.

Risk 5. Cyber threats

Consensus rating: 5,6

  • the collapse of cashless payment systems
  • the hacking of the servers of the state bodies
  • a threat to national security

In 2017, cyber security has become extremely important for Ukrainian business. As the head of the analytical Department at Eavex Capital Dmytro Churin, if earlier, computer viruses and DDoS attacks were local, but now those threats escalate into a major problem.

Suffice it to recall how on the eve of Constitution Day, on June 27, the entire Ukraine was under attack of the virus PetyaА. Although the epidemic of the virus has affected not only our country, to Ukraine, according to the company ESET, had 75.2 per cent of the total number of infected computers in the world, whereas in Germany and 9.1%, Poland — 5,8%, Serbia and 2.9%, Russia — 0,8%.

The reason for such a large-scale impact, according to experts, — the neglect of IT-the protection of private and public entities. “Cyber threats are traditionally underestimated. Both public and private sector continue to save for IT-security”, — said Inna Zvyagintseva.

“Ukraine has a very poorly developed information security and information services of state bodies, which significantly limits the technological progress and optimization of processes” — confirms the words of colleagues, the General Director of the company Pro-Consulting Alexander Sokolov.

Separately, according to the experts, the question of protection against hacker attacks strategically important for the country objects, in particular, energy facilities, airports, and financial infrastructure.

Oleg Pendzin advises to pay more attention not only hacking attacks but also cybermetal impact on the consciousness of the population. “Today, the Internet shapes public opinion. Its significance in changing the views of social groups is well demonstrated to the presidential elections in the United States. Hybrid war in cyberspace has not been canceled,” — said the expert.

Risk 6. Bad loans

Consensus rating: 5,4

  • curtailing lending programs
  • unaffordable for business loan rates
  • the slowdown in economic growth

The issue of problem loans today is probably the most important for the financial sector. Assessment of Inna Zvyagintsev, the level of bad debt in the banking system by about 60%. It is not excluded that will not solve the problem and this autumn.

The NBU requires banks to take out outstanding debts from enterprises. In particular, until October 4, the financial institution must submit to the Department of banking supervision of national Bank’s strategy for dealing with debtors-legal entities. Also financiers for two weeks need to provide the controller a list of malicious defaulters from the corporate sector.

As to deal with troubled borrowers, then the banks could help the adoption of the bill to increase trust between banks and their customers. But while the document is being revised by the relevant Committee of BP.

Do not have confidence that the regulator will bring to life the idea of transferring nonperforming portfolio specialized financial institutions companies asset management and specialized banks for bad loans and a batch of penalties. “The decision of this question is still no, although the state, according to the NBU, has spent more than 14% of GDP on the restructuring of the banking sector, and return at least part of this money will not be superfluous to budget,” says Maria Repko.

In turn, EBA reminded that no decisions on the packages of bad loans makes it impossible to reduce the cost of lending for both individuals and for businesses. According to experts of the EBA, as long as the problem debt is on the balance sheets of banks, financial institutions are forced to hold significant reserves to cover them. This prevents the banks return to the tone and to redirect cash flows to more “healthy” lending.

If the credit activity of banks will remain critically low, that is, in the opinion of the rector of the International Institute of business Oleksandr Savchenko, will not allow in subsequent years to grow the economy more than 3% per year.

However, the CEO of the company Pro-Consulting Alexander Sokolov in their estimates are more optimistic. According to him, the Fund of guaranteeing the deposits gradually realises the assets of failed banks, whereby it is possible to cover the demand of financial resources.

Risk 7. The devaluation of the hryvnia

Consensus rating: 5,0

  • inflation
  • the drop in consumer demand
  • fluctuations in the exchange rate

The banking sector reform, stabilization of international reserves and the improvement of Ukraine’s position in international rankings contributed to the strengthening of the hryvnia in the first half of 2017. Especially favorably the course looked in August, when the national currency was traded at the level of 25.5 UAH/USD. But in September, the national currency started to weaken and would continue, according to experts, to lose ground.

“I guess the high expectations of export earnings before the end of the year will restrain the fall of the hryvnia. However, the risk is borne by the fact that the budget was laid at an average annual rate of 27.2 UAH/USD, and as of September 27 he is 26.5 UAH/USD. It is possible that for balance-of-payments rate may be artificially inflated,” suggests Alexander Sokolov.

“Inflation is clearly within the defined budget by 2017 and draft budget for 2018. So the end of this year we will meet with the course 28,5 UAH/USD, and the end of the next — from 30 UAH/USD. At the same time, an election year marked by a complete lack of surprises with the course. Even if all is not well in the economy”, — said Oleg Pendzin.

Among external factors that will affect the dollar fall and winter of this year, experts say low investor confidence in the national currency and the abolition of most administrative restrictions on the foreign exchange market. This reinforces the vulnerability of the hryvnia in the speculative attacks.

“Despite the fact that the placement of Eurobonds has helped to smooth out the payment of 2019-2020, the level of payments forecast significant”, — says Director of the rating Agency IBI-Rating Alex Amphitheater. In his opinion, there are no prerequisites for qualitative changes in the structure of foreign trade, and, accordingly, the trade imbalance will increase. It also carries additional risks for the national currency.

Risk 8. Adverse global market conditions

Consensus rating: 4,7

  • lower prices for exported by Ukraine raw
  • increased pressure on the hryvnia due to the reduction of currency earnings of exporters
  • difficulties in attracting foreign investment

Adverse global economic situation along with the toxic state is the only risk, to counter which is impossible. Ukraine in the coming years will remain a raw appendage of the developed countries.

“Ukraine — a country with an economy extremely vulnerable to shocks in world markets. High level of public debt and fragile financial system is dramatically exacerbate the vulnerability,” explains the member of Ukrainian society of financial analysts Vitaly Shapran.

At least two of the crisis of the Russian economy in 1998-1999 and 2008-2009 — have been associated with a drop in commodity indexes in the world markets. Even the crisis of 2015, although he had more political than economic in nature, may have exacerbated the slowdown of China’s economy. After several decades of rapid annual growth of 9-10% pace of development of China dropped to 6-7%, which is reflected in the prices of raw materials. China — the world’s largest consumer of raw materials, and a further slowdown in its economy may lead to another decline in prices for metallurgical raw materials and agricultural products. And this, accordingly, entails a reduction of currency revenues of Ukrainian exports.

“The crisis of 2015-2016 badly battered Ukrainian banking system and slightly downgraded export potential, so that the country to the next commodity crisis is not ready. That’s just us, this one will not ask. In this and the complexity of the situation,” explains Shapran.

Unfortunately, the preconditions for another crisis in the commodities markets. The main one — almost simultaneous with the projected increase in interest rates of Central banks — issuers of reserve currencies.

Risk 9. Industry crises

Consensus rating: 4,6

  • the collapse of several sectors of the economy
  • the increasing import dependence
  • securing the position of a raw appendage of Europe

The biggest problem in the fall of 2017, according to experts, will continue to test banking sector. Financial institutions have not recovered “bankopada” era Gontareva. In 2016-2017, in addition to many small banks left the market and major financial institutions, leaving behind a trail of debts to depositors. Among them Platinumbank, Khreschatyk Bank, Fidobank, “Michael”, Delta Bank. In the end, according to the NBU, as at 1 July 2017 remaining on the market 90 to solvent banks only 70 in the first half of the year showed a net profit of 8.2 billion UAH. 20 suffered a cumulative net loss of 10.1 billion UAH.

Rector of International Institute of business Alexander Savchenko predicts that in the near future there will be a few failures and scandals in the banking sector. At the same time, Alexander Sokolov considers the most problematic sector, energy-related and reprocessing. In the energy sector difficulties arise because of the dependence on imported energy resources and outdated equipment. Processing industry in Ukraine is poorly developed. The situation is complicated by the military action and the transport blockade in the area of ATO. For example, a key problem of Ukrainian steel was the break of the production cycle, the availability and cost of transportation of raw materials and products W/d transport. All this, naturally, affects the production efficiency, since it leads to a sharp rise in the cost of raw materials and energy.

Almost lost competitiveness in world markets and the Ukrainian chemical industry. The causes of the crisis are the same — limited access to raw materials (gas, oil and ammonia) and of his appreciation.

Some experts predicted the imminent crisis in the real estate sector. Recently, the developers have brought to market a huge number of new objects, clearly exceeding the demand.

“Most likely, we will see a tightening of terms of construction of large objects. And small developers, not sold apartments in under construction houses will have to freeze them until a better time, as the funding of construction projects by 80% comes at the expense of buyers, and when sales are they are simply nowhere to get funding,” she explains.

Anna Derevyanko also drew attention to the crisis in the transport industry, which significantly affects the development of other spheres of business.

The risk 10. The collapse of the housing

Consensus rating: 3,7

  • mass non-payment of bills
  • problems with heat and electricity
  • the growth of social tension

Payment for housing and utility services for Ukrainians remains one of the most painful issues: tariffs are constantly increasing, and to pay for light and heat becoming overhead. As of the end of October, the arrears for housing and communal services reached 29 billion. Of these, 11 billion UAH — the debt of the population for gas and 9 billion roubles for hot water.

According to Alexander Sokolov, the volume of debts on housing and communal services at the moment though is high but not yet critical. Moreover, given that a substantial increase in tariffs is not expected, the state utilities are likely to remain at the same level.

“The risk of crisis in the housing sector exists, but it is unlikely. The current system, despite its imperfections, is still working. In the draft budget laid 55 billion in subsidies. This is not enough, and debts will accumulate, but the collapse will not happen”, — agrees with his colleague Oleg Pendzin.

Moreover, as noted by Alex Amphitheatres, the system of subsidies (according to state statistics, it gets more than half of households) in Ukraine is built in such a way that to prevent the delay in payments for housing and communal services to the population is extremely profitable.

But not receiving subsidies, Ukrainians will have a hard time. For example, in Kiev before the heating season, the owners of the apartments have already started to give “letters of happiness”, which indicates that they served in the court, by whose decision they will collect the amount of debt, penalty interest, court costs and even the funds for a lawyer. In Kiev court has already appointed such meetings.

Metropolitan monopolists Kyivenergo and kievgas not want to accept the defaults. It is because of them the inhabitants of the greater part of the districts of Kiev spent the summer and early fall without hot water. Did the monopolists at the same time to give adequate attention to the infrastructure, we’ll see when the heating season starts. Meanwhile, practice shows that because of the deterioration of the system provide utilities the risk of accidents only increases.

Drawings: Alexander Shatov

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