Phoenix Capital analyst Oleksandr Lozovyi writes: Real disposable income has stabilized and started to fill consumer pockets.
The Ukrainian economy still faces many challenges to recover from the deep crisis of 2008-09: The business climate is still arduous, bank lending is dormant and the government needs to work hard to combat corruption.
One positive story for the economy this year looks set to be an increase in domestic demand. The crucial industrial sectors will continue to gather pace in 2011, but this will be accompanied by enhanced activity in consumer-oriented sectors such as light industry, retail trade and food processing.
Signs that consumer-related sectors are picking up were already recorded at the end of 2010, with retail trade experiencing double-digit growth in December. Similar dynamics were recorded in the construction industry. We expect this trend will continue in the coming year.
As the crisis has subsided, people’s real disposable income – the cash in their pockets – has stabilized and started to creep up. This happened primarily as nominal wages increased while consumer inflation was contained at a single-digit level.
The stability of the hryvnia over the past year at around Hr 8 to the U.S. dollar also contributed to growing retail purchases as significant portion of households’ basket is imported. A stable hryvnia, therefore, passes through to stable import prices.
Customers stand outside a Bank Kyiv office on March 3, 2009. The nation’s banks still face strains from the global recession. Dragon Capital investment bank estimates non-performing loans at 12 percent, while two troubled banks – Nadra and Rodovid – still owe depositors nearly $2 billion. (AP)
People will increase purchases across the board, from clothes to leisure equipment, home appliances to cars.
With more money available and a greater willingness to spend it as negative impressions of the economic situation fade, there is good potential for a robust increase in consumer spending in 2011 after the dramatic fall of 2009.
This domestic demand should help strengthen and expand Ukraine’s economic growth, which previously had relied on commodity exports such as steel.
The recovery in consumer spending in 2011 will be to a much lesser extent driven by loans compared to what was observed prior to the crisis.
However, the influence of credit on the economy will strengthen in the second half of the year, as we expect commercial banks to boost activity in the retail loan segment.
Following more than two years of loss-making, Ukraine’s banking industry in 2011 should be marked by a gradual return to profitability.
Banks are expected to gradually shrug off bad loans amassed in the last two years and start offering more credits to companies and individuals. The process, however, will take an extended period of time.
Looking further ahead, Ukraine’s economic recovery should accelerate and reach 6 percent growth in 2012. By 2013, the economy is expected to recoup losses resulting from the slump of crisis-hit 2009.
Growth across the Central and Eastern European region will boost Ukraine’s development. Domestic demand will also play a role, as individual wealth converges with the regional average in the longer run.
The speed and breadth of the recovery depends largely on the government’s reform program, particularly in fighting corruption.
The ability of the government to combat corruption and preserve its commitments to democracy will be decisive in its attempts to attract foreign investment, which can help to cement and expand the economic recovery.
The administrative reform launched late last year is the government’s main policy towards combating corruption in Ukraine.
However, success or failure of the policy will be evident only in a few years. The government has more levers to reduce the level of corruption in Ukraine and should be more active in designing policies.
Oleksandr Lozovyi is an analyst at Kyiv-based investment bank Phoenix Capital. He can be reached at [email protected].
