World financial crisis expected to hurt nation

Economists warn that the country’s economy is overheating after eight years of resilient growth, driven by high prices for steel, the country’s main export, as well as record foreign investment inflows and heavy foreign borrowing.

But now, with an emerging world financial crisis on the horizon, steel prices falling and the prospects of yet another sharp hike in natural gas prices, the country is bracing to be hit simultaneously on several fronts.

According to state figures, industrial production declined for the first time in more than two years, by 0.5 percent in August.

Meanwhile, imports are flooding the market in a trend that moderates inflation, but has widened the trade deficit. The expectation for next year is that the price Ukraine pays for natural gas imports from Russia will at least double. All this and other factors could send the national currency tumbling.

“For Ukraine’s economy, this crisis, which has been unfolding since August 2007, means a sizeable slowdown of economic growth, if not a recession,” said Alexander Valchyshen, head of research at Investment Capital Ukraine, a private asset management and investment banking firm.

Edilberto Segura, chief economist at Kyiv­based private equity firm SigmaBleyzer, warned Ukraine’s government, investors and the business community not to underestimate the shock ahead for Ukraine.

“People are underestimating the vulnerability of Ukraine in the present financial crisis. The primary concerns are: Ukraine will find it difficult to renew its short­term debt, and to finance its current account deficit,” he added.

So far this year, foreign direct investment inflows have been high, at $7 billion, and the growth rate of gross domestic product has been high at some 7 per cent in the first half. Yet alarm over the upcoming world economic slowdown and domestic troubles facing Ukraine has already taken a huge bite out of the country’s small but budding stock market.

With all the bad news piling up, investors have pulled out equity markets across the globe. There was a particularly sharp panic of selloffs on the PFTS, Ukraine’s main stock trading platform. The market’s management intervened several times in recent weeks, halting trades to cool things down. But the damage was already done.

A bullish four­year run that commenced with the Orange Revolution of 2004 has been largely wiped out. More than two years of share price growth on Ukrainian­listed blue chip stocks has eroded. Prices for Ukrainian shares listed on the London Stock Exchange were also hit hard. True, Ukraine’s stock market is miniscule in terms of liquidity compared to peers such as the NYSE, the London Stock Exchange and Russia’s RTS. Russia’s market was also rattled hard with trading halted in recent days. But the downturn and other bad news specific to Ukraine serve as a signal of worsening investor confidence.

Speaking to journalists at a press conference on Sept. 16, Oleksandr Shlapak, deputy head of the presidential office, expressed hope that Ukraine’s economy will sustain any world crisis.

“I hope that the Ukrainian economy  is sufficiently strong today to withstand this crisis. It won’t be critical for our banking system,” he said.

But speaking on the condition of anonymity, representatives of leading Western banks visiting Ukraine said the world financial turmoil and Ukraine’s bleak short­term economic forecast will make it very hard for companies in the country to tap into financing this and next year. Easy access to foreign lending has helped fuel growth. But now, with credit markets empty and growth slowing, many companies could struggle to refinance existing debt or pay it off.

Valchyshen said an economic “squeeze” would first hurt many Ukrainian banks, particularly cash­strapped domestically­owned ones, as well as real estate development and construction companies. Both have in past years been highly dependent on external sources of funding to drive projects with a long maturity.

“Generally, every business that used to borrow with such maturity mismatch is a likely victim of the current crisis,” Valchyshen said.

Banks would, in turn, restrict lending to citizens who have in recent years engaged in a shopping spree thanks to a lending boom.

Investor caution turned into fear this summer after Russia’s military standoff with Georgia. As a rare pro­Western ally on post­Soviet turf, along with Georgia, Ukraine was tagged as Russia's next target.

And this month, market fears triggered a panic on Ukraine’s stock market following news that Ukraine was on the verge of sinking deeper into political paralysis with the collapse of a fragile pro­West coalition. The stock market selloff continued this week with news that the financial woes of Lehman Brothers, a U.S. investment bank, could spread like a virus to other financial institutions.

Economists said Ukraine’s GDP growth – while strong thus far this year – could slow noticeably in coming months as global demand for steel drops and other exports wane.

“Ukraine’s largest single trade partner, the EU (European Union), is on the brink of recession. Another key trading partner, Russia, is too fragile because it depends on high oil prices. If crude prices tumble because of global recession fears, then Russia will be under the threat of recession as well. Together these two areas of vital importance to Ukraine’s exports will drag Ukraine’s economy. This means the period of price disinflation – on real estate, for instance – is coming,” Valchyshen said.

Market alarm has also hit the share prices of some Ukrainian companies that broke ground in recent years by listing stock through initial public offerings on the London Stock Exchange.

Take, for example, leading Kyiv­based real estate developer XXI Century. Adopting a bullish growth strategy, the company raised some $140 million through a 2005 listing on the London exchange, and borrowed several hundred million dollars more through debt instruments, such as Eurobonds. The aim was to invest the lot in high­growth real estate projects in Ukraine. Their stock offered investors exposure to a hot property market exhibiting double­digit growth in recent years.

Yet analysts warn it all could come to an abrupt halt with simultaneous slowdown on Ukraine’s property market, along with the worldwide credit and equity crashes.

XXI Century has a pipeline of promising projects, a portfolio valued by investment bank Troika Dialog at some $2 billion. But the company has not yet been able to sell projects at strong prices to cover mounting debts. It could have difficulties refinancing this debt next year amid lasting credit woes, Troika said in a report this month.

Conscious of the trouble ahead, investors in London have dumped XXI Century’s stock. It’s share value dropped by more than 30 percent in recent days, and in total 57 percent since April. Majority­-owned by Ukrainian businessman Lev Partskhaladze, XXI Century specializes in developing office, retail, hotel and residential property in Ukraine. The company traces its roots to Partskhaladze’s real estate projects implemented in the 1990s.

In a statement, XXI Century said top management was currently reviewing options to revive the company, including the sale of non­core real estate development projects. It has also expressed interest in teaming up with cash­rich partners capable of funding its pipeline of projects.

“As is the case with many real estate companies, the continued uncertainty and volatility in the worldwide markets has led us to review our strategy,” XXI Century told the Post in a carefully worded statement.

The company suggested that the need for fresh investment has risen partly due to the credit squeeze, which has complicated the company’s ability to single­handedly finance its large portfolio of projects. To cut costs, the company announced this month it would cut its workforce by some 20­-30 percent.

“We are narrowing the breadth of our business to concentrate on those projects likely to offer the best returns in the current market,” the company added.