Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

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Ukraine Business outlook 2013- 17 Quarterly update – April 2013 by Dr Daniel Thorniley

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Executive summary (1) As we predicted, Ukraine’s economy suffered a very bad end of 2012 and weak start to 2013 The roll-over of 2012 weakness will contaminate 2013 Executives are managing expectations downward for this market Some executives will have been caught in a “budget trap” last autumn When companies were drawing up budgets for 2013 in Sept-Oct of 2012, the outlook had many risks but was not so weak. But the year-end slump has cast doubt on many 2013 corporate budgets and assumptions Ukraine’s slump at end of 2012 was part of a global one and stemmed largely from weakening exports and lower metal prices exacerbated by a weak global and Eurozone outlook

Transcript of Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Page 1: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

UkraineBusiness outlook 2013-17

Quarterly update – April 2013by Dr Daniel Thorniley

Page 2: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Contents

• Executive summary • Business outlook• Why do consumer companies not sell more?• Business features • Corruption update• Economic outlook • Inflation outlook• Currency outlook• Statistical outlook

Page 3: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Executive summary (1)

• As we predicted, Ukraine’s economy suffered a very bad end of 2012 and weak start to 2013

• The roll-over of 2012 weakness will contaminate 2013• Executives are managing expectations downward for this market• Some executives will have been caught in a “budget trap” last autumn• When companies were drawing up budgets for 2013 in Sept-Oct of 2012, the

outlook had many risks but was not so weak. But the year-end slump has cast doubt on many 2013 corporate budgets and assumptions

• Ukraine’s slump at end of 2012 was part of a global one and stemmed largely from weakening exports and lower metal prices exacerbated by a weak global and Eurozone outlook

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Executive summary (2)

• The GDP outlook will depend on which deal Ukraine cuts with either the EU or Russia and/or for how long it tries to go it alone in the open markets

• So far Ukraine has accessed successfully the Eurobond market • FX reserves have shrunk but then stabilised • Thus currency devaluation has been quite limited as we predicted but risks remain• Our GDP estimate for 2013 at 1.2% is lower than the consensus but we think there

are downside risks to even our estimate• Slower exports are damaging industrial output and investment • The economy and business outlook remains a twin-track one in that consumer

sector is stronger than B2B

Page 5: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Executive summary (3)

• Real wages have been and remain among the very highest in the world• But the consumer sector will inevitably be pulled down and is already weakening• The second half of this year will probably be noticeably weaker across the

economy but especially as consumer spending and confidence eventually take the brunt

• Extremely low (zero) inflation is a big help for the economy and consumption but prices will rise through the year

• Commentators are also questioning the validity of national inflation numbers (i.e. are they really so low?)

• Fixed investment is still in a post Uefa football tournament recession and Poland shares a similar investment fate after co-hosting that tournament

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Executive summary (4)

• It remains unclear “which way Ukraine will jump” into the arms of the EU or Russia• It must watch out it is not left stranded in the middle without any supporters• If Russia provides economic support on acceptable terms Ukrainian regime will opt

for the Russian route • Or to sum up: Rejected by the EU and not loved by Russia?• Ukraine would also like to get through currency/debt problems by using the

international financial markets rather than turn to the IMF, which is last option • Any IMF deal is more likely in summer when consequent gas price hikes would be

less painful • Growth, business and financial outlook will all depend on how government

manages finances, budget deficit and current account and much of this depends on which deal is cut, either with EU or Russia and the timing of any such deal

• The Russian option is the “easier” one economically but less so politically and some Ukrainian oligarchs are resistant to Russians taking over pipelines and dominating trade in a Customs Union

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Business outlook (1)

• Western companies will have to face a tough and changing reality this year• The “budget trap” of last autumn is affecting a growing number of companies• In our regional Survey conducted last November (next one is this summer) 60% of

executives forecast single-digit sales growth (NB this refers to the rate of sales growth and not market volume)

• The 60% of firms who forecast single-digit sales this year are split between those in low single and those in high single

• 15% of executives plan flat growth this year and the remaining 25% are hoping for double-digit expansion

• But based on recent conversations with executives in recent weeks and at year-end these numbers are probably optimistic

• In our Survey no company expected negative sales trends this year but this must be a growing possibility for some firms now

Page 8: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Business outlook (2)

• The problem is that Ukraine in mid-2012 was supposed to be one of the fast growth markets and indeed still rates as No 5-6 out of 23 CEE/CIS markets that we survey in terms of top-line sales results in 2012 and outlook for 2013

• Already in early November the B2B sector was slowing and had become single-digit sales growth market with 30% of companies looking for flat growth in 2013 and another 60% forecasting single digits and only 10% expecting double digits

• The end of Uefa football tournament and the resultant downturn in investment and construction along with falling exports caused the business slump in B2B

• One CIS regional manager of a major US B2B conglomerate reported last week that: “For us and many B2B companies the slowdown started in mid-summer and I half excepted this after the tournament. But overall industrial confidence was weaker than we expected. The end of the year and the last quarter were pretty bad and we are modifying our plans for the rest of this year”.

• This company had been planning for 8-10% organic sales growth but now the manager thinks 5% will be good

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Business outlook (3)

• Executives in the B2B sector were helped by infrastructure spending to the summer 2012 but domestic investment by the local oligarchs has slumped given their profitability has been hit by weaker exports

• With slowing exports, weakening confidence indicators and shrinking bank credits, it is little wonder that the B2B sector will have to take a fresh and more sober look at the market

• In fact, for B2B Ukraine rates only No 11 in the CEE region lower than its overall status at No 5-6

• This is due to industrial company executives realising that the better investment period of 2010-11 is now over

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Business outlook (4)

• The Ukraine country manager of one US agro-sector company commented thus by phone from Kiev last week: “The harvest was poor as it was across the region and the numbers turned bad through the autumn season. So our turn of year numbers will be disappointing but we are used to seasonal cycles although we don’t like them! However, Ukraine is a strategic market for us and our competitors and it has to be. We are here for the long haul and we are investing many millions into the market. There is substantial political risk in the short term but we are looking beyond that and placing a long-term bet on Ukraine”.

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Business outlook (5)

• Many executives want the first quarter “out of the way” so they can assess just how bad the follow-through from last year has been

• In the consumer sector, we forecast a significant slowdown but we must remember that these numbers are coming down from very high levels indeed

• There is “much to play for here”: consumption figures look set to plummet but from extraordinarily high figures, so will consumer products stabilise and survive or slow down sharply?

• But the outlook is sobering up• The regional CIS MD of a major European FMCG stated in December in Moscow:

“Recent months and weeks have been almost disastrous in Ukraine. I am not writing off the market, of course not, but it has been a very hard landing and we have to re-jig our strategy for 2013-14. Last year was ok to good but it is a tough market with growing competition and a lot of local players”

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Business outlook (6)

• Consumer products sector and related economy is less badly affected at the moment and low inflation is supporting strong (but weakening) wage trends.

• So far consumers are relatively spared and retail sales are still surging (see below)• But some FMCG companies report either a softening or something much worse• One country MD for European food company noted last month that: “Numbers are

relatively good and the food sector has rallied in recent months. But in some categories we see a clear softening from about mid-October. We were looking at 8-10% growth this year but this is now a challenge”

• Most CP companies look to single-digit sales expansion this year and about 25% look to double-digit sales which could now prove very ambitious

• For some CP comapnies the end of the year was a real struggle. As one CIS MD noted in Moscow in late January: “The final months of 2012 and the Christmas selling season was close to disastrous. We expected a slowdown but nothing as bad as this. We expect an economic slowing this year as well”.

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Business outlook (7)

• This company had grown annually in Ukraine at about 15-17% with strong sales of premium-priced products but like other firms the turn of the year results are causing considerable concern

• One regional manager in food and beverages spoke for many when he said: “Ukraine was supposed to be a compensatory growth markets in

2013 along with Russia, Kazakhstan and Poland because CEE has collapsed. But now it looks like Ukraine and Poland are slowing and I manage both of them!”• This looks like saying that Russia is “last man standing”• Prior to the year-end slowdown, food & beverage companies were anticipating a

bounce-back, continuing the trends in early 2012 as this sector was recovering from a deep collapse in 2010/11 when Ukrainian consumers downtraded

• Whether recovery in food & beverages is maintained this year is now questionable • But executives who were riding a small consumer boom with a variety of consumer

products are already experiencing a new reality

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Business outlook (8)

• Even prior to the second-half-year collapse, not all consumer goods companies were booming as a lot of purchases were taking place in kiosks, open markets and at the lower end of the consumer segment

• The downturn, if it continues, could make companies reassess the market strategically

• Ukraine presents huge challenges regarding corruption and compliance and while these issues were bearable against a backdrop of strong sales, companies are getting disillusioned that they face weaker, more volatile outlook while corruption remains very elevated

• Another regional manager for a US consumer products firm was down-beat last month: “The market has been better than good for us for several years and especially compared with the weaker CEE markets. But this was always against a background of huge corruption. In the last 6 months are results have almost collapsed and you wonder why you spend the effort for low growth in such a dirty market”.

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Business outlook (9)

• But we do not think that many or even any companies will yet “turn their back” on Ukraine

• The population size and the potential for something better politically, operationally and commercially is always there

• Certainly the political and compliance risks mean that companies have shied away from making investments on the ground and becoming “too local”

• But of course many of the big players especially in consumer products and food are heavily invested on the ground and have multi-billion dollar businesses as well

• It is more likely that any newcomers may have more doubts about entering a challenging market which is going through a soft patch

• Of course if newcomers are frightened off, then this only helps those already established on the ground

• This is not the case in Russia i.e. newcomers are less frightened by the environment and find the results attractive and so are coming on board

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Business outlook (10)

• For IT sales Ukraine ranks No 8 in the region but now some 40% of companies look to flat growth this year and the rest are spread across single-digit expansion

• Some smaller IT firms are able to grow in double-digits but most established companies are now even more looking for single digits given the recent economic slowdown

• The local MD of one US IT giant commented a few days ago in Kiev: “The market of course was until recently quite hot, if not as strong as Russia, but industrial confidence has weakened and investment has almost collapsed. I think the current mood is that companies locally don’t want to invest too much in IT products and have gone through all the productivity programs already which required our IT inputs. The government has been distracted but one could say that’s been the case for several years! If there is relative calm now, then just maybe government spending will accelerate but that is only a scenario”.

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Business outlook (11)

• Ukraine remains a good market for pharmaceuticals and ranks 7 in the region for the rate of sales growth

• As usual in other sectors, most companies forecast single-digit sales growth in 2013 but a healthy 30% also expect double-digit sales

• Some of this will depend on how the government manages its finances which this year will be under ever increased pressure unless a deal is cut with the IMF or with Russia

• Budget and FX reserves pressures could exert downward stress on government reimbursement spending and entail budget tightening

Page 18: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Why do western consumer product companies not sell more? (1)

• Western consumer goods companies should have done better than they did in 2012 given the consumer economic data but there are reasons to explain this

• There are several answers:– Ukrainian consumers are downtrading: Ukraine ranks 9th in the region for this

indicator, with 24% of companies experiencing this trend, rising to fully 40% of FMCG firms

– In a similar vein, they are shopping in kiosks and open markets and buying non-branded products – this was a feature for food & beverages companies in particular in 2011

– Consumers are still deleveraging from a pre-crisis credit boom – consumer credit has been falling since 2009 and dipped 9% in Q2 this year

• But there is another, deeper solution to the puzzle:– It seems that a growing number of workers and executives are “whitening”

their salary/income

Page 19: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Why do western consumer product companies not sell more? (2)

• The maths work like this: in the past someone was paid 1,000 hryvnia officially but received another 4,000 hryvnia “black” in an envelope

• Now they are declaring their official income as 1,500 hryvnia and still taking 3,500 black

• But these numbers make it appear that their salary has increased 50%!• When this trend is repeated often enough the official figures for nominal

wages can spike• But it does not mean that workers/executives have seen any real rise in their

income• If nominal wages are actually not rising as much as we think, then this also

applies to the bottom line of real wages • The upside is of course that falling inflation has certainly helped consumption

and confidence, but perhaps not at the levels the official figures would suggest

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Business features (1)

• Several executives (western and Ukrainian) at our recent meeting in Kiev said that: “Ukraine today is like Russia in the 2002-05 period.”

• The reference implies that business is picking up, but against a back-drop which is wild and unpredictable, and without a proper ring-fence of effective rules

• One senior MD of a western food & beverages company said amusingly: “Unpredictability is predictable.”

• Another echoed this with: “It’s like a satellite navigation system: you know where you are and you know where you want to go, but you still get lost!”

• The MD of one consumer company, which is one of the biggest investors in the country, commented thus:

“Unpredictability is at such a level that operationally we don’t have a serious budget. Budgets are for global headquarters to play with. It’s much more important that we create a business model that can change quickly and with a structure that is flexible and staffed with capable people in the right positions.”

Page 21: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Business features (2)

• An executive from a major European FMCG coined another phrase when he stated:“For us in our organisation, F is for flexibility.”

• In a discussion on corporate structures and approach to market, the MD of a European B2B firm confided that:

“Do we have the right system and structure to survive the next crisis? I am curious to know and genuinely do not have the answer to that question, not yet.”

• The crisis affected Ukrainian consumers, as it did those across the world and in the CIS, as the MD of a major global US consumer goods company commented:

“The crisis has moved closer to the Ukrainian consumer and affected many of them deeply. They are more careful with their money and they want value. We western companies must get constantly closer to these consumers and understand them.”

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Business features (3)

• Ukraine ranks no 5 in 2012 and No 6 for 2013 among 23 CEE markets in terms of top-line organic sales outlook

• In terms of a "priority market” it rates No 4 with almost a third of executives • Ukraine ranks behind Russia, Turkey and Poland• We will see what the difficult year ahead does to market prioritisation • Ukraine for now is still perceived as one of the key growth markets along with the

other regional winners Russia, Kazakhstan, Turkey and the smaller CIS markets such as Azerbaijan and even Georgia (the latter are of course tiny volume markets)

• The good news is that when it comes to reducing headcount or cutting market and sales expenditure few companies are in this mode (only about 5%)

• Of course this could change if sales/profits numbers shrink in a sustained fashion• Regarding downtrading some 23% of western firms cite this as a business issue• And almost 25% of firms report growing issues with receivables putting Ukraine in

the Top-10 for this issue, almost among the main problem markets but not quite

Page 23: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Corruption update (1)

• The MD of a major western investor narrated the following story: “My marketing team came up with idea that we should run a TV advert which would show our vitamin-enriched products making children stronger so that one of them could lift up a friend to a window so that he could see the answers to someone’s exam question, and then succeed in his exams thanks to cheating. I thought this was very inappropriate but when a focus group of Ukrainian mothers watched it, 9 out of 10 thought the advert was great!”

• A senior legal adviser from a major US legal firm felt that: “The extreme extent of corruption in our country stems from a failure of political will.”

• Certainly, even with good government policy implementation against corruption, it will require many, many years to see results from a clean-up operation

• One major law firm commented at the start of this year that, “Corruption is the worse we have ever seen it in the past 20 years.”

Page 24: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Corruption update (2)

• Comments have been made in the international media about the propriety and legality of some of the construction tenders for the UEFA football stadia construction

• Some of these constructions were promoted by well known Ukrainian oligarchs• And recently criticisms have surfaced about the process of recent energy

privatisations where tender offers boiled down to just one bidder by the time of the final auction

• To explain cynically what’s going on:In the past there were still competitive elements in the political, administrative

and commercial worlds, but with the political victory of the Party of the Regions and the effective purging (and arrest) of opposition strong-holds and activists, a monopoly for corruption has been consolidated in fewer hands

• Quite simply a monopoly for corruption has lead to monopoly prices!

Page 25: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (1) - GDP

• Our economic forecasts are based on the scenario that Ukraine manages a deal of some sort with the IMF later in the year or cuts a deal with Russia

• But risks to our forecast are on the downside and we will carefully review the data • All indicators have trended downwards for 2012 and 2013• GDP growth of 3% (year-on-year) in second quarter (Q2) of 2012 turned into a

disturbing minus -1.3% in Q3 and then collapsed further in Q4 by minus -2.7% leaving full year GDP at a mere 0.2% in 2012

• Investment last year tumbled to 0.9% after recording 10% in 2011 due to the completion of football-related investments

• Industrial output for the whole year was negative at -1.8 in 2012 • These numbers mean that B2B sales in Ukraine will be strained through 2013 and

even into the start of 2014 (see above figures in Business Outlook)• Note: 2013 growth and sector figures may be revised later as government has

introduced a change in statistical methodology

Page 26: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (2) - GDP

• 2012 slowdown stemmed from combination of poorer terms of trade, weaker metal prices, slowing credit, weaker European demand and a bad harvest

• Some of this will remain in 2013 but consumer spending still has some resilience at the start of 2013 and inflation is staying lower for longer

• This year we see some mild recovery to 1.2% GDP growth rising to almost 3% in 2014 but fixed investment stays weak at 0.5% this year and 4% in 2014 with industry still suffering at 1.4% this year and 4% next year. Household consumption (see below) will be a bit stronger than the industrial sectors

• First indicators for 2013 support these estimates: industrial output in Jan-Feb 2013 was down -3.7% on the same period in 2012 and construction was negative -15% in these two months with freight transport -10%

• These numbers will of course have to improve through the year if GDP is to reach 1.2% this year and industrial output to rise by 1.7%

• Credit emissions will receiver mildly this year and will be one support to the soft recovery we expect

Page 27: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (3) - agriculture

• As with other European economies, Ukraine’s agricultural sector suffered a bad year and estimates suggest that output was down by 12-18%

• Bad weather ensured that the wheat harvest plummeted -30% to 16m tonnes• One can summarise recent harvests in Ukraine and CIS as: 2010 = drought/disaster

(-15 to -20%), 2011 = very strong bounce-back at +10%, but 2012 once again sees a weak harvest down -5% to -6.5%

• Ukrainian farms lack financing to purchase decent equipment• Fertiliser usage is only 15-30% of western Europe and machinery usage per hectare

is only 3-15% • Labour costs remain low in this sector despite the labour over-intensity

Page 28: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (4) - which way to turn?

• Outlook for economy and consumers spending depends on which option the government chooses:

• The consumer sector will probably have relatively solid start to the year but then as inflation rises and confidence slumps, we expect a much weaker second half

• BUT if the government arranges an IMF loan or a Russian deal, there could be some positive compensation

• The point is that any IMF deal will be good for the long-term financial outlook of Ukraine but entail short-term pain as gas prices rises, inflation picks up with currency devaluation and these factors would obviously hurt consumer spending

• Any deal with Russia might not be better in terms of trade and long-term financing but managed and lower gas prices would be a strong support for consumer spending and the budget deficit in the short term

• If Ukraine tries to “go it alone” on the open financial markets which is the consensus for the next few months, then we expect the economy and confidence to survive but to be stumbling along with weakening forward trends

Page 29: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (5) - government

• One economic support in 2012 was government spending which surged by 2.5% thanks to the election cycle

• But this is once again a thing of the past and government spending will shrink this year by -1.0% or worse depending on budget deficit and from where financial support comes (Russia, IMF, no one)

• Government spending may be able to rise in 2014 once again depending on the kind of external financial support received this year either in cash from the IMF or cheaper gas from Russia

• Elevated subsidy costs, falling tax revenues and higher pre-election spending ensured that the budget deficit worsened last year

• The budget deficit finished last year at -4.2% and given less splurge spending and fewer subsidies, we predict a deficit of -3.4% this year and about the same in 2014

• Pressure on FX reserves which are down to $24n (but recently stabilsied) could force government to consider means to conserve FX including taxes on FX deposits but these steps are opposed by National Bank

Page 30: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (6) - trade

• Global and CEE regional exports/trade have tumbled throughout 2012 • Ukraine, which is so dependent on metals and sometime agricultural exports, has

seen demand and prices for its main exports decline sharply although with some stabilisation noted at start of 2013 but it is unsure whether this price stabilisation is sustainable

• Exports were already fragile in 2011 (up just 2%) but exports were negative in 2012 at -4.5% as they crashed in the last months of the year

• Exports rose in February 2013 by 8% after posting a decline of 3.6% in January • We see a moderate pick up this year by 3-4% while imports could fall further for

two reasons: 1) either Ukraine does a gas deal with Russia and import prices fall or 2) Ukraine does not do a gas deal and therefore maintains reduced volumes of gas purchases while global gas prices may also prove weaker in 2013

• The import bill would have been much higher if Ukraine had not reduced its volume of gas imports at current high prices in 2012

Page 31: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (7) – consumer spending

• Consumer spending is going to slow this year but much will depend on how quickly wages are negatively impacted by rising inflation

• In fact inflation remained very subdued in January-February this year which has meant that wages and retail sales (see below) have stayed buoyant

• But some western commentators question the validity of recent official inflation figures (see our inflation forecast below)

• Household spending surged 14.5% in 2011 but declined sharply in 2012 due to a weak end of year to 3.2% and this fall was anticipated

• The consensus view for household spending this year is 3.0% but this has been downgraded from three months ago when it was an estimated at 3.6%

• Risks are on downside and some official numbers could be revised downwards and we expect spending to rise by only 2.0% this year and to recover to 3.3% in 2014

• Some organisations expect household spending to barely rise this year by 0.5% and the gloomiest expectation is -3% which is weak but not impossible

Page 32: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (8) – consumer spending

• Nominal wages grew in the recession year of 2009 by 5%, rose 20% in 2010, some 17% in 2011 and stabilised at 15% last year

• This means that real wages after inflation were actually minus -10% in 2009, positive +10% in 2010, solid at 8.7% in 2011 and very strong in 2012 at 14.4%

• Nominal and real wages were almost identical in 2012 due to inflation at zero • We should remember that in recent years nominal and certainly real wages in

Ukraine have been among highest in world with only China/Russia coming close• The latest figure for February 2013 is real wages growing at 10.2%• This remains a very high number but clearly the trend is downward but presuming

that the first months of 2012 may still see real wages in high single digits, we expect full year figure to be about 3.5%

• This is clearly a collapse from previous years and will hurt consumer confidence but on the other hand it remains one of the best numbers in Europe so there is an upside as well

Page 33: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (9) – consumer spending

• As wages hold up, so too retail sales developments are bearable but downward• Retail sales grew 14-15% in 2011 and 2012, some of the best numbers in the world

again• In the first two months of 2013 retail sales have decelerated to 12.4% and we think

they will mirror wage developments ending 2013 at about 4.2% and rising to almost 5% in 2014

• BUT the risk to wages and retail sales are all on the downside and we could see these numbers averaging 1-2% in 2013 rather than 4-5%

• Unemployment will not improve much against this weakening investment and industrial backdrop and as government spending contracts

• After recording about 8% in 2011-2012 we expect a small climb to 8.3% this year before declining a bit to 7.6% by 2015

Page 34: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Economic outlook (10) - consumer spending

• Another reason why household consumption will slow this year is diminishing bank credits

• These rose by 9% in 2011 but crumbled though 2012 but were able to finish the year close to 4% expansion which is still a good number globally and within CEE region

• We are though a long way away from 2006-08 when new credits were rising annually at 70%! (unsustainably)

• As Ukrainian/western banks stabilise this year there is a chance that bank credit picks up by 6-8% but that is not a sure thing and will depend also on trends in non-performing loans and on asset management for some western financial investors

Page 35: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Inflation outlook

• Inflation was almost flat through 2012 and went negative from the summer helped by Central Bank monetary discipline, price subsidies and low food prices

• Given the poor harvest in 2012, food prices ought to have mounted but government subsidies prevented this

• As subsidies are removed, inflation will increase markedly as presumably gas tariffs will jump this year by at least 20% unless a surprise deal is reached with Russia

• From a low average of 0.6% in 2012 we see reduced subsidies and a weakening currency (down by 7-12%) taking inflation to an average of about 6.5% this year with a rising trend taking year-end inflation to about 8-9%

• But inflation in February was still negative by -0.5% although some investors question the validity of very low official inflation numbers in recent months

• There is more risk if the currency depreciates faster than in our central scenario • Weak demand/falling consumption ought to prevent inflation going over 10% • And in 2014 we forecast that inflation will stabilise and again average about 6.5%

Page 36: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Currency outlook (1)

• The hryvnia is holding up remarkably well to end of March 2013 • Executives were highly concerned about hryvnia collapse for last 15 months• We predicted correctly that this would not happen in 2012• Several major investors in the country predict a devaluation of about 10-13% over

the next 12-14 months and we share that view• But fears seem to be diminishing• Although the government and Central Bank will see a weaker currency helping

exports which are flagging• The currency came under pressure after the election falling to about 8.10 to the

dollar but then strengthened below 8.0 due to the ruling on mandatory surrender requirements for exporters introduced on 19 November

• The currency has also been protected by Central Bank interventions and tight liquidity and low inflation and in 2013 has fluctuated in a tight band of 8.0 to 8.15 and is currently again at the stronger level

Page 37: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Currency outlook (2)

• But protecting currency has brought FX reserves down to a low of $24.5bn and excluding gold down to $22.6bn. In February 2013 FX numbers stabilised but could come under further pressure

• This is quite a fall from levels of over $30bn in 2011 and takes the reserves total below the benchmark of 3 months’ worth of imports

• Currency depends on three options on how the country will finance itself this year• Ukraine can get finance/debt support from either 1) the IMF or 2) Russia with

lower gas prices or 3) financing its debt on the open financial markets if these markets will buy Ukrainian treasuries and assets

• Ukraine tapped Eurobond market twice recently at high but not impossible yields• We predict the hryvnia at 8.9 to dollar at year-end (average 8.4) and then declining

to 9.15 in 2014 (average 8.9) which is also the consensus view which is moving away from any stronger devaluation

• If the government fouls up it above financial management, then downward risks reappear

Page 38: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

Ukraine - economic outlook: statistics

2011 2012 2013 2014 2015 2016 2017GDP 5.2 0.2 1.2 2.9 3.4 3.8 3.9Fixed investment 10.1 0.9 0.5 3.8 5.0 5.0 5.2Industrial output 7.6 -1.8 1.7 2.5 3.7 4.0 5.3Household spending 14.5 3.2 2.0 3.3 3.9 4.1 4.4Government spending -2.4 2.2 -1.0 1.0 1.4 1.7 1.9Real wages 9.0 13.5 3.5 3.5 3.8 4.0 3.8Retail sales 14.0 15.0 4.2 4.8 5.1 5.5 5.5Consumer prices (average) 8.0 0.4 6.5 5.8 5.5 5.3 5.5Budget deficit (% GDP) -2.6 -4.2 -3.4 -3.3 -2.6 -2.0 -2.4Current account (% GDP) -5.6 -8.2 -6.3 -5.7 -4.8 -4.2 -4.5Exports 2.0 -4.5 3.5 6.8 7.5 7.0 9.0Imports 14.0 1.1 2.7 6.2 7.0 7.1 8.0Hryvnia/Euro (year-end) 10.5 10.5 11.8 11.5 11.7 11.6 12.0Hryvnia/dollar (year-end) 8.0 8.0 9.1 9.2 9.3 9.3 9.7Unemployment (%) 7.8 7.9 8.3 7.9 7.4 6.9 6.7

Note: Real annual % change unless stated

Page 39: Ukraine Business outlook 2013-17 Quarterly update – April 2013 by Dr Daniel Thorniley.

© 2013 CEEMEA Business Group* *a joint venture betweenDT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,Company registration: FN 331137t and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, AustriaCompany registration: FN 331082k Source: DT-Global Business Consulting GmbH and CEEMEA Business Group researchBasic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey, governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.

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Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbHM: +43 676 534 6852 / E: [email protected] / W: www.ceemeabusinessgroup.com