Экономика и политика

According to the State Statistics Committee of Ukraine, foreign direct investments into the country’s agriculture, hunting and forestry expanded by 60.95% YTD to USD 897 mln in 10M08.

Our view: According to estimates by various specialists, the Ukrainian agro-industrial complex requires a total of USD 25 bln. Growing investments in agriculture are adding value to the stocks of agricultural companies. A profound impact of the global crisis did not omit the agricultural stock, resulting in the downgrading of soft commodities prices and floundering liquidity. While the impressive 1H2008 financial results were supported by robust margins, the prices of Ukrainian agricultural stock has been considerably downgraded.

Nevertheless, we believe that falling prices are a perfect momentum for investors, as Ukrainian stock is currently substantially undervalued.

The National Bank of Ukraine (NBU) officially stated its support for prolonging the loans terms for agrarians until June 1, 2009. According to the Prime Minister of Ukraine, Yuliya Tymoshenko, the NBU confirmed its support at their last meeting on Tuesday.

Our view: Earlier in November, the Ukrainian Government proposed the loans’ prolongation. The draft legislation proposed that loans, obtained by agrarians in the period of 2005- 2008, would be prolonged until November 1, 2009 and interest would be retained at the levels registered in the previous loan agreements.

In our view, the proposed draft would not be effective without NBU support. With the NBU’s agreement to support this, we see the loans’ prolongation as an effective tool in mitigating the possible negative consequence of the credit crunch for both agrarians and banks as well, as it decreases the risks of unpaid loans.

Recently, the National Bank of Ukraine disclosed that, in the period October 1-November 1, private bank deposits in UAH (hryvnia) and foreign currency fell by 4.1% (or UAH 8.378 bln) from UAH 204.376 bln to UAH 195.997 bln. In particular during this period, private deposits in UAH fell by 9.8% (or UAH 12.396 bln) from UAH 126.686 bln to UAH 114.290 bln. Corporate deposits in UAH and foreign currency fell by 0.6% (or UAH 0.835 bln) from UAH 135.782 bln to UAH 134.947 bln.

Since the beginning of the year, however, private deposits have risen 19.2% or UAH 31.532 bln, private deposits in UAH have risen14.6% or UAH 14.574 bln, and corporate deposits have risen 16.6% or UAH 19.258 bln.

According to the latest statistical data from the NBU, the average interest rate for short-term (average monthly) deposits in UAH rose by 1.5 p.p. from 10.9% to 12.4% in October.

Our view: In the first days of October when the banking crisis struck Ukraine, individual and corporate investors withdrew large amounts of deposits, which forced the NBU to take Prominvestbank under temporary administration on October 7 and to issue resolution ¹319, prohibiting the early withdrawal of deposits and restricting the provision of credit on October 11. It also resulting in providing refinancing resources to banks (the biggest amounts of which were a UAH 5 bln loan to Prominvestbank and a UAH 1.5 bln loan to Nadra Bank) and making a sequence of other arrangements to save the Ukrainian banking system from collapse.

We believe that the NBU’s actions were justified and almost opportune; however after some days of panic and some time after the issuance of resolution ¹319, negative tendencies in Ukrainian banking system have been demonstrated, such as falling levels of deposits, instability of the hryvnia on the FX market, and a lack of credibility. The massive withdrawal of deposits has caused liquidity problems with Ukrainian banks, led to interruptions in consumer lending and awarding of mortgages, and an increase in the interest rates on deposits and loans, even post factum.

It’s worth mentioning that banks with foreign capital during this period have been feeling support from their parent structures. A number of banks such as Alfa-Bank Ukraine, Raiffeisen Bank Aval, Ukrsotsbank, and Kredobank have successfully received funding.

As we mentioned in previous Sokrat daily reports, two of Ukraine’s top10 banks (by assets) that have been problematic – Nadra Bank and Prominvestbank – are going to change ownership in the near future, which might relieve these banks from their current liquidity problems.

According to recent non-official data, the volume of bank deposits have ceased falling in most Ukrainian banks. We believe that the peak of the Ukrainian banking crisis is behind us now and after the issues with problem banks have been resolved, we will be able to call situation stable. As well, we anticipate that the next challenge will be to increase the level of non-performing loans, caused by declining salaries, the deflation of the hryvnia, a real estate price bubble, and a massive level of existing consumer credit.

According to an announcement by the State Statistics Committee of Ukraine, net FDI inflow to Ukraine in quarterly terms has slowed down to USD 1.17 bln, compared to USD 3.66 bln in 1Q08 and USD 3.55 bln in 2Q08, thus totaling USD 8.08 bln for the period January-September 2008. Thus, the quarterly net FDI inflow has hit a sixquarter low. The next lowest was observed in 1Q07 when the net FDI inflow amounted to USD 0.85 bln.

Therefore, the January-September 2008 net FDI slowed down its growth to 54.2% YoY, compared to 133.2% YoY growth in January-June 2008.

According to the statistics, the gross FDI inflow into the Ukrainian economy in January-September 2008 was USD 8.52 bln with foreign divestments amounting to USD 0.66 bln. Revaluation and FX rates changes amounted to USD 0.22 bln.

The biggest volumes of the net FDI in January-September 2008 came from Cyprus (USD 2.6 bln), Germany (USD 0.9 bln), the Netherlands (USD 0.7 bln), Italy (USD 0.7 bln), and the Russian Federation (USD 0.6 bln). Sector-wise, the greatest volume of FDI inflow was observed in the financial services sector (USD 2.5 bln), real estate operations and engineering (USD 1.2 bln), industry (USD 0.8 bln), trade (USD 0.8 bln), and construction (USD 0.5 bln). Industry-wise, the greatest FDI was registered in the food industry (USD 0.19 bln), machinery (USD 0.15 bln), chemical and petrochemical industry (USD 0.13 bln), and metallurgy and metal processing (USD 0.12 bln).

Notably, the FDI volumes from Ukraine to other countries in January-September 2008 fell 87.6% YoY and amounted to USD 79.5 mln.

Our view: We view the slowdown in FDI growth as a negative signal for the Ukrainian economy, caused by two fundamental factors: the global credit crunch, coupled with pessimistic expectations of foreign investors regarding Ukraine’s economic prospects in the near future. The worldwide liquidity crisis is resulting in developed countries’ investors reconsidering their investment strategies, with a greater emphasis placed on supporting their domestic businesses and less investments directed to emerging and frontier markets, such as Ukraine. Political instability, coupled with pessimistic prospects for the Ukrainian economy is causing Western investors to question the efficiency of their investments at this point in time and the possibility of postponing them to some point in the future.

An additional factor resulting in the slowdown of the FDI inflow is the clear undervaluation of Ukrainian assets at the moment, which makes domestic owners of businesses unwilling to sell their assets to foreign investors at this point in time.

We see two possible scenarios in 2009. According to the first scenario, FDI inflow volumes will slow down substantially as Western investors redirect their investments to developed markets until at least mid-2009 and Ukrainian owners remain unwilling to part with their clearly-undervalued assets until 2H09. The second scenario assumes slightly higher volumes of FDI inflow compared to the first scenario, as Ukrainian owners facing risk of bankruptcy would sell their assets to Western investors despite a lower-than-fair price. Additional factors causing a slowdown in FDI inflow are the anticipated devaluation of the UAH in 2009, preventing Western investors from entering UAH-denominated assets and the Presidential elections in early 2010 (and possible emergency Parliamentary elections in 2009), which are adding to overall political instability.

Preparations for the Euro-2012 soccer cup will somewhat support FDI inflow to Ukraine, yet we anticipate that Western investors will consider delaying investments they may otherwise have made in 2009 to more politically and economically stable options that may be available to them in 2010.

In either case, we view our earlier forecast for USD 7.0 bln in FDI inflow to Ukraine in 2009 as being rather optimistic and are putting it under review.

Given the extent of the global financial crisis’ impact on the Ukrainian economy, we also revise our FDI inflow forecast for 2008 down from USD 11.5 bln to USD 8.8 bln.

The State Statistics Committee of Ukraine released figures about real GDP dynamics in October; GDP fell 2.1% YoY, compared to 5.5% YoY growth in September. GDP in January-October grew 5.8% YoY, compared to 6.9% YoY growth in January-September.

The biggest value added growth in January-October took place in agriculture (18.3%), transportation (10.4%), and trade (6.3%). All sectors grew YoY except construction (9.6% decline).

GDP in Ukraine grew 7.6% in 2007 and 7.3% in 2006.

Our view: The GDP growth slowdown is caused by two fundamental factors: decline in steel prices, as well as the impact of the global credit crunch. The drop in global metal prices resulted in the earlier-announced decline in the metallurgy and, consequently, in industrial output, a quarter of which is accounted for by metallurgy. The global liquidity crisis resulted in a substantial slowdown in those sectors dependent on loans, such as construction.

We believe that the prospects for GDP growth are anything but optimistic and we do not see the tendency to be reversed until global steel prices start to grow and loans become more accessible for Ukrainian companies.

We view the GDP decline as the first signal of an upcoming recession in 1H09. Earlier, Sokrat revised its 2008 GDP forecast down to 4.5% and has put its 2009 GDP forecast under revision.