JUNE, 2001
Compiled by SigmaBleyzer Economic Research Team
Dr. Edilberto Segura, Chief Economist
Neal Sigda, Head of Equity Research
Kharkiv and Kyiv, Ukraine
Ukraine Economic Growth Report For June, 2001
UKRAINE EXPERIENCES THE LARGEST MONTHLY
ECONOMIC GROWTH SINCE INDEPENDENCE
Kyiv, Ukraine...June 8, 2001...Economic growth in Ukraine has continued at a brisk pace during the year 2001. From January to April 2001, real gross domestic product grew by 8.5% compared to the same period last year. In April alone, GDP was 10.8% above April 2000. The 8.5% monthly growth is the largest monthly growth registered in Ukraine since independence in August of 1991.
The major driver supporting the growth in GDP continued to be the industrial output sector. In April, industrial output rose by 20.8% compared to April 2000. During the first four months of this year, industrial output grew by 8.5% year-on-year. Ukraine's performance in this sector is the best for CIS countries, and one of the best for any emerging market.
The Ukrainian government has increased its economic forecast for year 2001 as a result of the improvement in output performance. It is now forecasted that GDP will grow by 6.2% in 2001, with industrial production growing by 10.7% and agricultural production by 6.5%.
FISCAL POLICIES
The government of Ukraine has continued to exhibit sound fiscal policies. Ukraine's consolidated budget showed a surplus of about US$41.2 million. This is according to the government's methodology which includes privatization receipts as revenues.
The fiscal surplus was achieved in spite of the fact that privatization receipts have been lower than planned. Privatization receipts amounted to US$230 million, compared with a target of US$360 million, during the five-month period from January to May 2001.
Government revenues are expected to be increased by the cancellation of the Kartoteka (rules that authorized the State Tax Administration to unilaterally withdraw funds from the bank account of debtors). The cancellation of the Kartoteka is broadening the tax base as it encourages enterprises to move from the shadow economy to the official economy.
However, to compensate for lower privatization revenues and likely delays in securing international finance from the International Monetary Fund (IMF) and the World Bank, the government expects to reduce government expenditures by about $US300 million during the rest of the year 2001.
MONETARY POLICIES
The money supply increased by 6.2% during the period from January to April 2001. This growth rate is consistent with a planned expansion in the money supply of 19% for the entire year. During the same period the inflation rate was 4.3%. This rate is also consistent with the anticipated inflation rate of 13.6% for the year 2001.
The purchase of foreign exchange by the National Bank of Ukraine (NBU) provided stability to the foreign exchange market. Local currency remained at the same level of 5.45 UAH/US$.
Nevertheless, sound monetary policy during the rest of the year will depend on the success of the government in renewing IMF financing, which would allow Ukraine to serve its external debt without resorting to major purchases of foreign exchange in the inter-bank market.
Another risk for stability is the possibility that, during the second half of 2001, the balance of payments may deteriorate due to an accelerating growth of imports caused by the high pace of GDP growth and the need to make payments due on the import of national gas.
The National Bank (NBU), under a pessimistic forecast which assumes no IMF funding, forecast its reserves would fall to US$770 million by the end of the year.
GOVERNMENT DEBT
External debt service during 2001 will amount to approximately US$1.8 billion. Of this amount US$700 million is due to the IMF. This figure excluded about $US1.0 billion of bilateral debt service due to the Paris Club. The restructuring of the Paris Club debt would be in jeopardy if the resumption of the IMF program were to be delayed.
The resulting level of external debt service by the country could not be served without affecting monetary stability. Therefore, the resumption of IMF funding will be an important element to maintain financial stability. Otherwise, to service debt, the NBU would be obliged to expand the money supply by increases in its purchases of foreign exchange.
INTERNATIONAL TRADE AND CAPITAL
The balance of payments situation for Ukraine has remained favorable during the first quarter of 2001. Ukraine showed a surplus of US$816 million in its foreign trade and services balance, compared to a deficit during the same period last year.
During the first quarter, exports of goods and services reached US$4.6 billion, a growth of 15.8% compared to the same period last year. Imports of goods and services declined by 5.4% to US $3.8 billion. Russia remained Ukraine's major trading partner, holding a 25% share in exports and a 40.2% share in imports.
Major improvements have been made in reducing the level of barter trade, in favor of cash payments. The volume of goods exported via barter terms fell by 70.1% and the volume of goods imported via barter terms fell by 81%, when compared to the first quarter of 2001.
Foreign direct investments (FDI) in Ukraine totaled only US$168 million during the first quarter of 2001, a decline of 5.6% year-on-year. This reduction is due to the political uncertainties which have faced the country, despite the good economic performance.
The appointment of Anatoliy Kinakh by the President, his quick approval by the Rada, and the expected announcement of his economic policies in late June 2001 will have an important effect on the future level of foreign direct investment to Ukraine.
SECTOR AND COMPANY REPORTS
Poltavakonditer, a confectionery company located in Poltava, Ukraine, announced it was starting the construction of a new plant which will double the production capacity of the company. The plant, located on the edge of Poltava, will come on line on in 2002. Poltavakonditer has received a significant private equity investment from SigmaBleyzer, through the Ukrainian Growth Funds (UGF), which will allow the company to expand its production, sales and marketing.
Production at Poltavakonditer has tripled since 1997 and is expected to reach 20,000 tons this year. Chairman of the Board, Igor Plaksiy, said the existing plant is operating almost at full capacity and the additional plant is needed. Mr. Plaksiy has been in the confectionery business almost 40 years and has been with the plant in Poltava since 1979. The plant employs almost 1,400 workers.
The company started producing chocolate candies in 1998 and have developed their own brand names. A new brand of chocolates, DOMINO, has been introduced by Poltavakonditer recently according to marketing manager, Valeriy Plaksiy. Mr. Plaksiy operates the companies wholesale office in Kyiv and manages the distribution and marketing operation for the entire company. Kyiv has become a large market for the company according to Mr. Plaksiy. Poltavakonditer's base market is Ukraine but it also exports a considerable volume of product to Russia.
The Chumak Company (Kherson region) plans to increase the production of tomato juice by 200-250% in 2001. Chumak operates several food processing factories and is a major company in the fruit and vegetable processed foods industry. Tomato juice production is expected to increase to 7.5-8.75 million two-liter jars this year.
Chumak also announced it plans to increase its mayonnaise sales by 80% to 3,000 tons in 2001. This would increase its share of the Ukrainian market from 2.5% in 2000 to 4.5% in 2001. Chumak expects to almost double mayonnaise production. Chumak's major brands are Spravzhnyi and Salatnyi and Chumak indicated they will be introducing some new brands this year.
The economic news from Chumak continued to be very positive in June as the company also announced it will increase its sales of refined vegetable oil by 143% this year to 30 thousand tons. The company plans to increase its market share from 13% to 30% by the end of the year. Chumak and Oleyna (Dnipropetrovsk Vegetable Oil Processing Plant) are the best known brands in Ukraine in the packaged oil segment of the consumer retail market.
Over US$35 million has been invested in Chumak since first factory was acquired in 1997, including about US$15 million in foreign direct investment. Chumak presently owns four factories and produces ketchup, sauces, mayonnaise, canned fruits, and sunflower oil. Chumak has, in a short period of time, become one of the best known companies in Ukraine in the packaged retail food business. The Chumak company was founded by Carl Sturen and Johan Bodan. Sweden's South Foods was the principal partner.
Mr. Sturen and Mr. Bodan spent a year looking around Ukraine before choosing the Kherson region as the location for their new business. The Kherson region offered some of the largest irrigation channels in Europe, huge quantities of fertile land, good climate conditions, a substantial work force and was the location of food processing plants which had been closed and could be purchased and renovated.
Agricultural production grew 6% in January to April compared to the previous year. In 2000, agriculture rose by 9.2% while it decreased by 5.7% in 1999.
Raiffeisenbank Ukraine, the largest foreign- owned bank in Ukraine, has increased its capital to Hr 155.5 million. The NBU has registered Raiffeisenbank Ukraine's new share capital at Hr 92,668,900 according to NBU Resolution No. 53 of March 14, 2001.
Ihor Frantskevich, chairman of the board of Raiffeisenbank Ukraine, announced the bank will open affiliate banks in Kyiv, Donetsk, Dnipropetrovsk and Zaporizhia before the end of the year. They are also considering Kherson and Mykolaiv as locations for affiliates according to Chairman Frantskevich.
Stirol, a chemical concern, had revenues of Hr. 261 million in the first quarter, up 80% over the first quarter of 2000. The company exported 78.5% of its total output. Stirol is the largest domestic producer of mineral fertilizer, polyester, and medications.
The food industry in Ukraine today is the largest recipient of all investments with a 21% share. The share of domestically produced food products on the Ukrainian market has grown to 92%. The growth rate in the industry during year 2000 was over 20% .
The Donetsk brewery increased its beer output by 31.2% to 1,052,000 decaliters in May. The Donetsk brewery plans to increase its beer sales by 44% to 12.4 million decaliters this year compared to the year 2000. The brewery produces about 30 brands of beer, most of which are marketed under the Sarmat brand name. The United States D.B.S. Corporation is a co-founder of the Donetsk brewery a joint-stock society.
The newly appointed Deputy Prime Minister in charge of the agricultural sector, Leonid Kozachenko, promised this week to prevent attempts by regional authorities to interfere on the grain market and that no restrictions will be imposed on the movement of grain from one region to another this year. "On my part, I will do everything to prevent it," Kozachenko said.
The new Deputy Prime Minister has been in the private agribusiness business sector for many years and has been a strong advocate for a private market economy in Ukraine. The private agribusiness industry in Ukraine welcomed the remarks by Minister Kozachenko as the numerous restrictions imposed on grain by various governmental authorities in the past have caused considerable payment problems for the private international suppliers of agricultural inputs in Ukraine.
Until his appointment, Kozachenko, 46, was the president of Agroland Company and was president of the League of Entrepreneurs in the Agro-Industrial Sector, a large private trade association representing the private agriculture and agrobusiness sector of the Ukrainian economy.