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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2005 UKRAINIAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Politic and Economic Environment: Among the Commonwealth of Independent States (CIS), the Ukraine, with its abundant industrial and agricultural resource base, was generally considered the leading candidate for rapid transition to a market economy. The Ukrainian industrial complex, centered in the mineral rich southeastern region, provided a wide range of valuable raw materials and finished products to the other republics of the former U.S.S.R. Likewise, the historic ability of Ukraine's rich soil to supply large quantities of diverse agricultural products within the region was widely expected to be an engine of growth and development in the market economy transition. Similar to other transitional CIS countries, an informal economy has evolved in the Ukraine, which is estimated to now generate approximately 50% of total (but unreported) gross domestic product. Privatization of large enterprises has moved slowly, but the amount of privatization proceeds in total has been rising. In 2000, for example, sales of state-owned enterprises generated proceeds equivalent to about 1.3% of GDP, more than double that amount received the previous year. Viktor Yushchenko was sworn in as president after winning a rerun of the troubled 2004 election. He described the outcome as a "great national victory" and promised to take Ukraine along the road of European integration. ECONOMIC RATIOS PAGE 140 Ukraine Lower-middle-income group Mr Yushchenko is an economist and banker by training. He served as prime minister under Leonid Kuchma between 1999 and 2001 when he was credited with steering through successful economic reforms. Mr Yushchenko is regarded as a pro- Western liberal reformer. He promises to build a country in which there is freedom, democracy and rule of law. He also pledges that alleged corruption by the outgoing authorities and several high-profile crimes will be investigated. Viktor Yushchenko's victory in the presidential election in late 2004 has already begun to translate into greater political openness and faster economic reform. However, the 2006 parliamentary election, in-fighting within the government, and the planned switch to a more parliamentary political system will all be significant distractions and will limit the extent to which reforms can be speeded up. 1 Economic Performance: In 2003, Ukraine's steel exports were gobbled up by China, while capital investment in Russia garnered a need for Ukrainian machinery. This export boom spurred investment and construction in Ukraine, that when coupled with an expansion in access to consumer credit, drove real GDP growth of 9.3% in 2003, up from 5.2% in 2002. The inflation rate (as measured by the GDP deflator) increased to 9.1% in 2003 from inflation of only 2.9% in 2002 due to skyrocketing food prices related to a poor harvest. The fiscal balance in 2003 rested at a small deficit of 0.2% of GDP compared to a deficit of 0.4% of GDP in 2002–relatively small, but still reflecting 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 Markets in Ukraine www.dfp.gov.ua Domestic savings Trade Indebtedness Investment GROWTH OF INVESTMENT AND GDP (%) 30 20 10 0 -10 -20 -30 97 GDI GDP inefficient tax administration. Prospects for continued growth look good if the government can continue to maintain macroeconomic stability. Wage levels in the Ukraine, though rising fast now, are still about one half those in Russia and less than one quarter of those typical of the countries that entered the European Union in May 2004. Exports grew 25% in 2003, resulting in a current account surplus of 5.9% of GDP. In the financial and capital account, foreign direct investment (FDI) is flowing in, partly in response to privatization efforts. In 2003 FDI jumped to US$ 1.4 billion. Accordingly, the Ukraine's overall balance of payments has swung into surplus and the NBU has been accumulating foreign currency reserves as a result. The level of those reserves as of yearend 2003 was nearly US$ 6.7 billion, up significantly from the severely depleted level of the crisis year 1998. Real GDP growth is expected to decelerate to 6.5% in 2005 and to 6% in 2006. Year-end inflation is forecast to slow to 8% by 2006. The currency has strengthened recently, but will remain broadly stable in nominal terms against the US dollar in 2005-06. The current-account surplus reached a record high in 2004, but will decline in 2005-06 as export growth diminishes. 2 1 BBC News Online, http://news.bbc.co.uk/1/hi/world/europe/country_profiles/11 02303.stm, January 2005 2 Ukraine Country Report, Economic and Political Outlook, The Economist, www.economist.com 98 99 00 01 02 03 * World Bank reports
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2005 UKRAINIAN STOCK EXCHANGE UKRAINE GDP/EMPLOYMENT BY SECTOR OF ORIGIN Sector % GDP % Employment Agriculture 12.0 21.7 Industry 26.0 32.4 Services 62.0 45.8 UKRAINE MONEY SUPPLY, INTEREST RATES AND FOREIGN EXCHANGE RESERVES GROWTH OF EXPORTS AND IMPORTS (%) 25 20 15 10 5 0 -5 -10 -15 -20 EXPORT AND IMPORT LEVELS (US$ Millions) 25,000 20,000 15,000 10,000 5,000 0 97 Exports Imports Exports 97 98 99 00 01 02 03 Imports 98 99 00 01 02 03 1998 1999 2000 2001 2002 Money Supply M1 (hyrvnias-billions) 10 14 21 30 40 Money Supply M2 (hyrvnias-billions) 16 22 32 45 64 Growth Rate M1 14.8% 36.4% 47.1% 43.1% 35.2% Growth Rate M2 24.0% 40.6% 44.5% 43.0% 42.3% Interest Rates deposit rate 60.0% 45.0% 27.0% 12.5% 7.0% lending rate 54.5% 55.0% 41.5% 32.3% 25.4% Foreign Exchange Reserves (US$ millions) 761 1,046 1,353 2,955 4,241 Exchange Rate Period Average (hyrvnias/US$) 2.4495 4.1304 5.4402 5.3722 5.3266 Annual % Growth 31.57 68.62 31.71 -1.25 -0.85 INFLATION (%) 30 20 10 0 CURRENT ACCOUNT BALANCE TO GDP (%) 7 6 5 4 3 2 1 0 -1 -2 -3 GDP deflator CPI 97 97 98 99 00 01 02 03 98 99 00 01 02 03 * Economic Overview, Country Watch Incorporated, 2005 * World Bank reports PAGE 141
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