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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007
UKRAINIAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
The centrist PoR has come to dominate
Ukrainian politics in recent months and is
expected to remain the most significant force
on the political scene in 2007-08. The March
2006 parliamentary election handed the PoR by
far the largest share of seats in the legislature,
and the party has since then managed to set
up a majority coalition with the parliamentary
left. Since August the PoR has also dominated
the cabinet, which is headed by the party
leader, Mr Yanukovych. Although the PoR's
internal strains have become more apparent in
recent weeks, its discipline and financial
resources are still well above those of any other
political grouping. These qualities–combined
with the enhanced powers enjoyed by the
parliament and the cabinet since the start of
2006–should permit the PoR to retain its
current powerful position in 2007-08. There is
little prospect that any other parliamentary
faction could form–and lead–an alternative
majority coalition.
The "declaration of national unity" in theory
commits the PoR to the president's pro-
Western foreign policy priorities, and it is
expected that the new government will continue
to implement the EU-Ukraine Action Plan. This
runs until 2008 and will then be reconsidered
by the EU, alongside the partnership and cooperation
agreement (PCA) that expires at that
point. The government will most probably
pursue membership of the World Trade
Organization (WTO), albeit with considerably
less urgency than the previous two cabinets. In
other areas, however, the PoR is already calling
for a more "balanced" foreign policy. In
practice, this will mean closer ties to Russia
and a less unconditional approach to Western
integration.
The new governing coalition is not expected to
break completely with the generally pro-reform
policies espoused by the previous government,
even though it is dominated by the former
opposition and includes both of the left-wing
parliamentary factions. The economic interests
that dominate the governing PoR are keen to
expand links with the West and to pursue probusiness
policies. This will ensure at least
gradual and uneven progress on structural
reforms, deregulation and liberalization, which
are prerequisites for Ukraine's joining the WTO
and deepening links with the EU. However, the
new government brings back into power many
of the oligarchic economic interests that
prevented meaningful reform and allowed the
shadow economy to flourish under the previous
president, Leonid Kuchma. This suggests little
scope for progress on sensitive reforms such
as energy sector restructuring, and greater risk
that privatizations will return to the insider deals
witnessed in the past. The political force that is
most serious about bringing the shadow
economy into the open–the Yuliya Tymoshenko
Bloc (YTB)–is now in opposition.
Economic Performance
The most recent data have indicated that the
economy grew by 5.4% year on year in the first
half of 2006–rather than by the 5% previously
reported–and that the expansion accelerated to
reach 6.2% year on year in January-September.
Full-year growth of 6.5% in 2006 now appears
likely, which is well above the 2.6% recorded in
2005 as a whole. The forecast for annual
growth of at least 6% in 2007-08 reflects a
number of considerations. An end to electionrelated
uncertainties is now likely to begin
encouraging investment, and an ongoing rise
in earnings will help to ensure that household
consumption growth remains strong–even
though real personal incomes are unlikely to
continue to rise at the buoyant pace recorded
in 2005, and incomes will be affected
by rising utility prices. However, with incomes
growing at a decelerated rate, steel export
prices set to decline and gas prices rising
further, real GDP growth is still forecast to slow
slightly in 2007.
Year-on-year consumer price inflation
accelerated beyond 9% in September owing to
the sharply higher electricity and agricultural
prices recorded that month. Consumer prices
are expected to rise slightly more quickly over
the remainder of the year and in 2007 as well,
before then moderating in 2008 in the absence
of both gas import price rises and further
administered tariff increases. The accelerating
inflation expected over the next year will reflect
not just rising gas prices and higher utility
tariffs, but also the looser fiscal stance.
Moreover, currency inflows resulting from
increased investment are expected to rise. This
will offset part of the reduction in trade-related
currency inflows, thereby limiting the
deceleration in money supply growth.
The National Bank of Ukraine (NBU, the central
bank) has kept the hryvnya steady against the
US dollar since April 2005. It has indicated that
it intends to prevent the currency diverging
much from its current rate. The hryvnya is
expected to weaken moderately against the US
dollar over 2007-08 in the face of a growing
trade deficit (the government's 2007 budget
proposal assumes a slight depreciation). All of
this will translate into a modest real effective
appreciation during that period. Owing to the
rapid increase anticipated in the trade deficit,
the risk of greater than expected currency
weakening against the US dollar has grown.
Another risk to the forecast comes from the
possibility that the NBU could begin a de facto
pegging of the hryvnya to a basket of
currencies, rather than just to the US dollar as
at present.*
* The Economic Intelligence Unit Ltd., October 2006
Key Information Contacts
Securities and Stock Market State Commission www.ssmsc.gov.ua
Ministry of Finance www.minfin.gov.ua
State Property Fund of Ukraine www.spfu.gov.ua
State Committee of Financial Monitoring www.sdfm.gov.ua
State Commission for Regulation of Financial Services’ Market in Ukraine www.dfp.gov.ua
2001-ORIGIN OF GROSS DOMESTIC PRODUCT (%)
2005-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Industry
Services
Private consumption
Public consumption
Agriculture
Gross fixed investment
Increase in stocks
Net exports
35.1
70
69.3
60
41.5
50
40
23.4
30
20
22.0
10
0
7.6
0.1 0.9
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