The Intesa Sanpaolo Studies and Research Service has recently published the Economy focus pertaining to the political and economic situation of theUkraine. The document, drawn up by Giancarlo Frigoni, reports the economic dynamics with respect to the past year and the assessments of the country's future performance, also in the light of the agreements recently entered into with Russia.
The Ukrainian 2013 was marked by a recession generalization of the country's economy and strong political tensions. The latter have not yet subsided due to the economic aid that the government has agreed to receive from Russia (provided it does not continue with the Association Agreement with the European Union). The economic problems that Ukraine had to face during the year that has just ended can, in large part, help to understand the reasons for this change of direction.
Among the factors that in 2013 led to a negative performance of the Ukrainian economy, we certainly find: the recessionary trend of the economic system (characterized by a contraction of the GDP compared to the same values of the previous year), the currency depreciation national (which was also followed by the loss of huge foreign exchange reserves) and the growth of debt (estimated, until a few weeks ago, as "highly speculative"). These elements are then to be associated with a series of structural weaknesses which prevent the country from gaining in attractiveness as regards the acquisition of Foreign Direct Investments not necessarily coming from the Moscow government.
The contraction of Ukrainian GDP in 2013 it is certainly an indicative sign of how the country's economy has been under pressure during the year. In fact, despite in 2012 the GDP reported a - albeit small - growth of +0,5% compared to the period 2004-2008, 2013 showed a negative trend (-1,5%) compared to the previous year. Both the investment fall be the reduction of exports. From this point of view, the 0,3pp increase in foreign trade is to be attributed, rather than to an increase in international demand, to a contraction in domestic demand with respect to foreign products and services. The trade deficit, given the premises, it was therefore increased by USD2 billion compared to the previous year. Specifically, it went from USD12,2 billion in 2012 to USD14,2 billion in 2013.
The other problem that the Kiev government has had to face concerns the devaluation of the national currency. The Ukrainian hryvnia (UAH) depreciated by 2,3% in 2013 and the expectations of its further depreciation during the year that has just begun had already emerged in the first weeks of 2014. However, the agreement with Russia which, among other points, guarantees the acquisition of USD15bn Eurobonds issued by Ukraine, has made the supporters of this hypothesis retreat. The promise of receiving Sovereign Wealth Funds from the Moscow government is certainly one of the reasons that prompted Kiev to abandon the agreement with the European Union. The funds will ensure not only a breath of fresh air for Ukraine's foreign exchange reserves (already down by almost USD18bn since 2011) but also a less alarmist approach gives part of international markets.
The factor that, however, worries the agencies the most rating it concerns the sovereign debt of Ukraine, also in the light of future Russian concessions. Ukraine's debt has grown steadily in the last few years. In 2013 the Deficit/GDP ratio was 41,5% and according to the expectations of financial analysts it is destined to increase further. But that is not all. What worries most, is the country's inability to repay its debt. The country has one net international financial position of USD65,2 billion and reserves are not enough to cover it. It is for this reason that throughout 2013 the main agencies of rating they have considered the Ukrainian debt as "highly speculative" and although the same agencies have recently re-evaluated it as "neutral" (given the agreements with Russia), it must, however, be kept under control.
The above problems, which have weakened the economic position of Ukraine over the past year, are exacerbated by a number of structural weaknesses from which the country struggles to free itself. Ukraine has serious difficulties in acquiring new foreign investment as it is regarded as a too complex and opaque system in which to undertake activities. Not only is the country lacking in infrastructure, but it is, above all, in the grip of one bureaucracy perceived as little efficient it's a lot corrupt. It is for this reason that the World Bank places Ukraine in 112th place in the ranking of countries where it is easier to do business (so-called Ranking of Doing Business), well below Russia and many emerging economies. We must not forget that Kiev's economic system depends heavily on the economic cycles of Russia and the euro area, whose difficulties inevitably fall on the Ukrainian economy: just think of the economic shocks to which the population has been subjected in the past due to a too high price to pay to Gazprom for the supply of gas.
In conclusion, one could say that the current and future situation of Ukraine can be summarized in the data of theEIU (the Unit of market of the The Economist,) who estimate a country risk of 5,3 (in a range ranging from 1 to 10 where 1 indicates the maximum risk and 10 the minimum). Although 5,3 is an assessment that is 0,1 points better than that made in the previous year, it cannot yet be considered reassuring for both Ukraine and its potential investors.
