V.Yurchyshyn

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
Ukraine, the European Union and International
Community Current Challenges and the Agenda for
Overcoming the Stalemate Scenarios for economic
and political developments in the medium and
long-run Vasyl Yurchyshyn, Razumkov Centre,
Kyiv, Ukraine
V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
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Ukraine 2000 September 2008 average annual
economic growth 7.5. The decline in real GDP
in 2009 by 15.1 industrial production by
22.0, construction by 45.9, transport by
48.0 drop in fixed investments by
46.2 How may the losses of the recession be
measured?

V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
2
GDP per capita in Ukraine
2005 2005 2007 2007 2009 (e) 2009 (e)
PPP PPP PPP
1761 6848 3035 6914 2500 6400
In 2009 level of 2006, reflecting 110th
place in world (IMF)
Average wage (monthly) (end of the period)

2007 2008 2009
UAH 1475 1917 1950
292 333 244
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
3
Risky performance of Ukrainian economy Internal
The consumer-oriented domestic demand with low
income of households - Final consumption
84.6 of GDP private consumption 65.4,
public consumption 19.2, - Investments
17.1 of GDP High energy-dependence (imports)
with low processing degree or semi-finished goods


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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
4
Risky performance of Ukrainian economy
(cont.) External High openness of the economy in
2009 exports amounted to 46.3 and imports to
48.0 of GDP Lack of diversification - over 50
of total exports are comprised by only a few
products of low added value, such as metals,
chemicals, grains. Narrow geographic
diversification. The key trading partners
(Russia, Turkey, Italy, Poland, Belarus, Germany)
take a half of total exports High volatility of
demand for Ukrainian exports - revenues remain
unstable and unpredictable.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
5
External resources (CABFDI) and economic growth

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
6
Deterioration of public finances in 2009 UAH
70 bn (7.5 GDP) if including bank
recapitalization, Pension Fund, etc. overall
11.5 GDP
Ukraines External Debt ( bn, beginning of the
period)
  2008 2009 2010
Total 80.0 101.7 104.0 (85 GDP)
Government 11.9 12.0 17.8
NBU (Central Bank) 0.5 4.7 6.2
Banking system 30.9 39.5 30.8
Corporate 33.6 41.3 44.1

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
7
Decline in deposits and credits to households
in 2009 to 48.8 of total bank credits real
shocks for business and households after several
years of rapid growth of crediting

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
8
In 2001-2008 actually fixed exchange rate
UAH/USD. Crisis in the autumn of 2008 exchange
rate adjustments with huge losses of the Reserves

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
9
Recent development (and prospects for the
future?) consolidation of political power with
the leadership of the President Political
consolidation. After the presidential elections
- formation of new Parliament coalition, lead by
the Party of Regions (PR), - new Government -
primarily from the representatives of PR, -
rotation on the regional level new consolidated
policy on the regional level, - elimination of
permanent (for last 5 years) conflicts between
President and the Government, - implementation
of the President and the Government initiatives
under the support of the friendly coalition.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
10

• Economic improvement in 2010
• - Industrial output grew by 12.6 (January-May),
• including double-digit growth in the main
  industries
• metallurgy (22.2 yoy),
• oil-chemical industry (23.8),
• machinery building (28.0).
• Low comparative base of the previous year !
• Further reduction of inflationary pressure (with
  0.3 and 0.6 deflation in last two months).
• BoP improvement last months CAB-surplus,
  international Reserves growth by 2,5bn in after
  election period.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
11

• Economic improvement in 2010. (cont.)
• In short-run (2010) possible to expect
• further improvement of the CAB,
• reflecting price reduction for imported gas,
• lower inflation (less than 10 yoy),
• if gas tariffs for households are postponed,
• - discount for imported gas supports price
  competitiveness of basic exporting industries,
• - further price stabilization due to UAH slight
  appreciation, declining pressure from the
  current account.
• Measures to support the economy inevitably mean
  substantial growth of the state role in business.
  As a result politicisation, deinstitulisation,
  monopolisation of the economy

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
12
Institutional Outlook The quality of the
business environment in Ukraine remains
unsatisfactory - the country is ranked 145th out
of 183 countries in terms of Ease of Doing
Business, - domestic and foreign businesses
still face an onerous burden of excessive and
costly regulatory, licensing and taxation
procedures, - weak business climate holds back
private sector, which restrains the growth of
investments, employment, output and welfare.
Past sources (exports, cheap credits,
domestic consumption) are unlikely to be the main
drivers for Ukraines GDP growth in future.

V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
13
Are current trends stable and irreversible? Exter
nal risks possible dissemination of the
second wave of the European economic and
financial crisis, followed by its negative
impact on Ukrainian exports and capital
inflows into Ukraine. Internal risks
deterioration of the financial stability of the
banking system and increasing fiscal
problems as a result of the suspension of
economic recovery. Ukrainian government has no
experiences and incentives for the consistent
introduction of systemic transformations.

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15
Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
14
Prerequisites for Ukraines development The
Committee for Economic Reforms has been
established under the President to create and
deliver an Economic Reform Program for 2010-2014.
The main priorities of the Program - setting a
framework for ensuring long term macroeconomic
stability - keeping low inflation -
stabilizing public finances - developing a
more sustainable financial sector. Resumption
of co-operation with the IMF is still seen as a
dominant. No bilateral loan would be able to
match the 12-18 bn IMF financing that may become
available under a new program

V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
15
Prerequisites for Ukraines development
(cont.) At the same time, successful
implementation of the Program means fruitful
cooperation with IMF and other IFIs. Restoring
cooperation with the IMF means also improving
collaboration with the World Bank and EU, which
gives investors a positive signal on the
reduction of macroeconomic risks. And vice
versa Postponement of the reforms (particular,
due to local elections in late October 2010) will
push Ukraine into slow and poor economic
activities, at least in mid-term. Failure in
adoption of the Program for cooperation between
Ukraine and the IMF means increasing economic
imbalances, capital outflow, social losses.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
16
In the absence of a new Ukraines program of
cooperation with the IMF (internal consequences)
- Failures in full balancing public finances -
Automatic blocking or high cost of alternative
external financing (including adopted 500m from
EU) - Impossibility to reduce tax rates, that is
required by the economy for its acceleration -
Continuation of the policy of active domestic
debts. This will lead to growing of the pyramid
of domestic T-bills - Strengthening of the
investment famine and decreasing the conditions
for sustainable macroeconomic growth, -
Significant decrease/collapse of confidence to
the national currency, high devaluation
expectations as the result of predicted net
capital outflows.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
17
In the absence of a new Ukraines program
(external consequences) The information on
terminating the cooperation with Ukraine by the
IMF can create a negative informational
intervention. That forms negative secondary
effects - Phasing out funding of by other
international financial institutions (e.g. World
Bank, EBRD) - Reducing the sovereign ratings of
Ukraine and the rising cost of foreign borrowing
- Complications in restructuring sovereign and
corporate debts.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
18
Scenarios for economic development of Ukraine
Optimistic is associated with the establishment
and consistent implementation of transformations
that should radically improve the economic and
investment environment of Ukraine and bring it
into the path of sustainable long-term
development. Realistic is characterised by
slow and cautious improvements, which are not too
risky for the government, that mainly support the
current structure of the economy, but do not
provide significant incentives for improving
productivity and incomes of the population.
Pessimistic Ukraine faces a combination of the
deep global slowdown (due to expanding crisis in
euro-zone) and imbalanced domestic macroeconomic
policies. Demand for Ukrainian exports declines
sharply, capital outflow speeds up, budget runs
in sizable deficit, and weaker currency and sharp
reduction in household incomes push the economy
into new deep recession.
V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
19
Some characteristics of the scenarios
  realistic realistic realistic optimistic
GDP growth, (mid-term) GDP growth, (mid-term) GDP growth, (mid-term) 3-4 5-6
Budget balance, GDP (2012) Budget balance, GDP (2012) Budget balance, GDP (2012) -4.5 -3.3
CAB, bn (2012) CAB, bn (2012) CAB, bn (2012) -1.0 -1.5
FDI, bn (2012) FDI, bn (2012) FDI, bn (2012) 4.8 6.5
FX Reserves, bn (2012) FX Reserves, bn (2012) FX Reserves, bn (2012) 22.0 32.0
UAH-dynamics UAH-dynamics UAH-dynamics depreciation (autumn 2010) slight appreciation
Government in economy Government in economy intervention and privileges intervention and privileges deregulation
Privatization Privatization redistribution of state property redistribution of state property transparent contests
Debt Debt T-bills pyramid T-bills pyramid sustainable

V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
20
Realistic scenario assumes that the global
economy remains weak, but the process of recovery
continues to strengthen in 2010-2012 . External
demand for the Ukrainian products (metal,
chemical industries) remains weak and
unpredictable. Weak domestic demand, relatively
stable world crude oil prices, 30 discount for
imported gas, helps to curb inflation, and
imports of goods that narrow current account
deficit. High deficit of public finance at least
in the short- and mid-term. Depreciation
pressure will not be weak but NBU will continue
to support UAH. Investment attractiveness of
Ukraine remains depressed and productivity,
efficiency and effectiveness of the economy are
frozen at an insufficient level. Debt repayments,
including sovereign debt, seem quite manageable
for 2010-2012, but worsening since 2013.

V.Yurchyshyn
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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
21
Optimistic scenario global economy enters a
soft but relatively stable recovery path and
euro-zone economy restricts its
imbalances. External demand for the Ukrainian
products slightly restores. Continuation of the
IMF-program helps to maintain investors
confidence at a comfortable level. Implementation
of tax reform, business activities stimulation
(slight decreasing of hidden economy). Worsening
of CAB that reflect higher domestic demand,
expansion of technological imports from EU
(cheaper due to UAH appreciation). FDI inflow,
particularly due to expansion of privatization
processes, stimulates appropriate economic
growth. Foreign debt is balanced (IMF, World
Bank, other IFIs financing), UAH appreciation.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
22
Further developments restructuring the
management system, eradicating corruption,
increasing responsibility and new governance
require significantly more time, realization of
the optimistic scenario is much more complicated,
since macroeconomic tasks are added to problems
of the structural and institutional
transformations, which are principally new for
Ukraine. Even if some traditional sectors
(i.e. metallurgical or chemical industries)
remain an important component of the economy,
they will not continue to be a moving force for
the development of the whole economy, unless
companies change their production for high level
of added values. Activation of the projects
oriented for the football championship Euro-2012.
Use potential in those sectors of the economy,
which might be achieved either by the positive
economic dynamics of the whole economy, or by
their geographical position of the country
logistics, tourism, construction, and the
automobile industries customs procedures with
neighbouring countries, significant increase in
the quality of roads, transport services and
infrastructure.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
23
Further developments (cont.) Contradictions
social protection vs sustainable
budgets, currency appreciation vs
competitiveness, effective privatization vs
employment, wage and income growth vs
disinflation and UAH-depreciation, technological
imports vs CAB balance The restoration of the
public trust a prerequisite of the end of the
crisis will depend on sustainable growth of the
population income, abidance by the principle of
social fairness by the state, and protection of
human rights and interests.

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Scenarios for economic and political developments
in the medium and long-run. Case of Ukraine
Ukraine, the European Union and international
community current challenges and the agenda for
overcoming the stalemate Thank You for your
attention
V.Yurchyshyn