Transcript Forecast for political developments in Ukraine

Consequences of the
political crisis
Results for 2004
Forecast for 2005–2006
Press conference
International Centre for Policy Studies
20 December 2004
Plan of the presentation
1.
2.
3.
4.
About the International Centre for Policy Studies
Forecast for political developments in Ukraine
Preliminary economic results in Ukraine for 2004
Impact of the political crisis on economic
development. Forecast for 2005–2006
5. What kind of regional policy is optimal for Ukraine?
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
About the International Centre
for Policy Studies
International Centre for Policy Studies
• Is an independent research organization, founded
by the Open Society Institute in 1994
• The Centre’s goal is to introduce public
policy-making concepts and procedures in Ukraine
• Works in tandem with various interest groups:
government, business, NGOs, media
• Web-site is at www.icps.kiev.ua
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
What makes ICPS forecasts better
• The Centre has been preparing regular economic
forecasts for Ukraine since September 1997
• Quarterly updates of these forecasts make it possible to
take into account new data and changing trends
• Our analysts’ conclusions are not slanted
• Since 2002, the forecast period has been extended to
three years (now through 2006)
• Since 2003, the Centre has been publishing a monthly
analysis of government policy, political competition and
external relations under the “Political Commentary”
project
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Forecast for political
developments in Ukraine
Daria HLUSHCHENKO
The democratic, middle-class revolution
• The votes on 31 October and 21 November failed to
clearly determine a new president
• As predicted, the election campaign was the dirtiest
the country had ever witnessed
• Mass protests against vote-rigging were supported
primarily by young people and Ukrainian SMEs
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Forecast for the outcome
of the 2004 presidential election
• Viktor Yushchenko will win the 26 December vote
• A repeat rigged vote in favor of Viktor Yanukovych is
not very likely: the system for fixing the vote has
been broken
• Eastern and southern oblasts may not recognize
Mr. Yushchenko as Head of the State
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Forecast for political reform
• The president will continue to be the key political
figure, provided that he effectively uses his powers,
despite limitations imposed by Constitutional reform
• The Verkhovna Rada will quickly form a new
majority that will support President Yushchenko
• The influence and effectiveness of political parties
will grow
Міжнародний центр перспективних досліджень
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Forecast for reforms
• Democratic and market reforms should pick up
considerably in mid-2005
• Reforms to the tax, residential services and social
security systems should remain on track
• Corruption and government intervention in
economic processes will be reduced, not the least
because of the growing role of independent media
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Forecast for foreign policy
• The president, the Verkhovna Rada and the
Government will make efforts to develop relations
with both the EU and Russia
• Moscow’s determination to be the only full-fledged
FSU negotiator with the EU, NATO and the US will be
undermined
• Ukraine could turn into the epicenter of western
influence among CIS countries
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The transformation of relations
with Russia
• In the pursuit of mutual benefit, relations with
Russia will become more pragmatic
• Emotional positions such as “the friendship of
brotherly peoples” will be dropped from the
political vocabulary
• Russia will be unable to manipulate Ukraine’s new
president
• The CEA as Russia sees it may never happen
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Prospects for European integration
• Recent events in Ukraine have proved a watershed
in the way that the country is perceived in Europe
• A democratic presidential election and the events
preceding it could bring the prospect of Ukraine’s
accession to the EU closer
• Relations with Brussels should become more active,
while foreign policy will be clearly oriented towards
accession
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Forecast for Ukraine-US relations
• Ukraine will work to establish better relations
with the US
• Satisfying US demands regarding a democratic
election should help resolve current problems
in bilateral relations
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Preliminary economic results
for Ukraine in 2004
Andriy BLINOV
The risk to economic forecasts
proved correct
• The political crisis means that the economy will
develop according to a risk scenario that the basic
ICPS forecast did not predict
• The Centre predicted that a president would be
determined in the run-off and that the loser would
acknowledge this victory
• The Centre predicted smaller-scale vote-rigging
• The Centre predicted lower volumes of social
spending on the part of the Government
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Economic trends at year’s end
• The political crisis did not turn into an economic
one and the economy did not show any sudden
deterioration
• The economic impact of a radical political struggle,
threats of separatism, and ineffective work on the
part of government bodies will be no more than
0.5% of annual GDP:
– a lending ceiling will be instituted
– productivity will slip
– foreign trade contracts will become more expensive and
some will be broken
– Budget revenues will shrink
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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External conditions and economic growth
annual % change
40
GDP of key trade partners
Export of goods&services
Import of goods&services
30
20
10
0
-10
-20
1997
1998
1999
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
2000
2001
2002
2003
2004
Tel. (380-44) 236-4477
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Real GDP quarterly change, %
18
16
2002
2003
2004
14
12
10
8
6
4
2
0
I
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
II
III
IV
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Reasons for the economic slowdown
Economic growth will slow to 12% by the end of 2004
for three reasons:
• Cyclic: five years of rapid economic growth under
condition where there was insufficient investment
and inflation accelerated to 12%
• External: a stop in the brisk growth of prices on
world commodity markets
• Political: the short-sighted election policy of the
Yanukovych Government, lower investment growth,
huge capital flight
Міжнародний центр перспективних досліджень
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Investment growth not excessive
GDP, real % change
Gross fixed investment, real % change
Investment, % GDP (right scale)
18
15
12
21
20
19.8
19.3
19.7
19.7
19
19.2
18.4
9
18
6
17
3
16
0
15
-3
14
1999
2000
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
2001
2002
2003
H1'04
Tel. (380-44) 236-4477
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Ukrainian consumers lose confidence
110
100
90
80
70
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Q3'04
Q2'04
Q1'04
Q4'03
Q3'03
Q2'03
Q1'03
Q4'02
Q1'02
Q4'01
Q3'01
Q2'01
Q1'01
Q4'00
50
Q3'02
60
Q2'02
Index of Economic Expectations
Consumer Confidence Index
Index of Propensity to Consume
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Stable growth remains impossible
• Insufficient development of domestic markets due to
excessively porous economy (export/GDP ratio > 60%)
• Concentration of metals exports (> 30%)
• Obstacles to business development: “governmentbusiness” relations, dishonest competition, high political
risk
• Low volumes of foreign investment
• Weak role of SMEs (10% of GDP)
• Few opportunities for the financial sector to finance
business or the general population, narrow range of
services
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
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Impact of the political crisis on
economic development.
Forecast for 2005–2006
Andriy BLINOV
Forecast for 2005
All government bodies will resume working and mass
protests will stop
• The priorities of the new Government will be stemming
inflation, lowering the costs of foreign trade operations,
stabilizing the banking sector, avoiding a payment
default, and adopting a fiscally sound Budget
• GDP growth will continue to slow, going down to 7%,
due to trends that emerged in 2004 and low investment
at year’s end
• A moderate Budget deficit (2.5% of GDP)
• In H1’05, inflation is likely to hit 15–16% year-on-year
and settle at 11% by year-end
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Assumptions regarding economic policy
• After the election, the quality of government policy
should improve, while economic reforms will pick up
• Investors will show stronger interest in Ukraine
• The new Government will maintain social
commitments made by the previous Government,
but it will not be able to increase social support
• Ukraine should accede to the WTO in late 2005 –
early 2006
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Risks to this forecast
The presidential election will be delayed and state
administration paralyzed
• The political crisis will turn into an economic one
and a recession will emerge
• High inflationary expectations will wreck the
financial system and deepen the Budget crisis
• Inflation will gallop ahead (self-sustained), causing
a payment default and banking crisis
• Growing risk of economic disintegration
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slowdown in economic growth
GDP, real % change
15
12,0
-5
-3.2
-8.7
-9.9
-15
-1.9
7.5
2006
0
5.2
7.0
2005
5.9
5
-10
9.4
9.2
10
-0.2
-10.0
-12.2
-14.2
-20
-25
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
-23.0
Tel. (380-44) 236-4477
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Investment will grow faster than GDP
real annual % change
18
GDP
16
Consumption
14
Investment
12
10
8
6
4
2
0
2000
2001
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
2002
2003
2004
2005
2006
Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Foreign investment will continue to grow
annual FDI net influx, USD millions
2500
2000
1500
1000
500
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Tel. (380-44) 236-4477
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Slowdown in different economic sectors
gross value-added, real % change
30
2002
2003
2004 (forecast)
2005 (forecast)
2006 (forecast)
25
20
15
10
5
0
-5
Trade
Industry
Agriculture
Transport
Construction
-10
Міжнародний центр перспективних досліджень
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An improving macro-financial situation
• A gradual reduction in the Budget deficit through:
− revision of blanket privileges
− stabilized expenditures (29% of GDP)
− a gradual retreat from micro-managing
− no emerging new debts due to availability of financial
resources (privatization + international borrowings)
• Slower inflation
• Stable USD/UAH exchange rate and slower growth
of EUR/UAH exchange rate
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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A shrinking Budget deficit
Consolidated Budget revenues and expenditures, % GDP
36
34
Revenues
32
Expenditures
30
28
26
24
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
2006
2005
2004
2003
2001
2000
1999
1998
1997
20
2002
22
Tel. (380-44) 236-4477
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A stable nominal exchange rate
UAH/forex
7.5
7.0
6.5
EUR/UAH
exchange rate
6.0
5.5
USD/UAH exchange rate
5.0
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
12'06
06'06
12'05
06'05
12'04
06'04
12'03
06'03
12'02
06'02
12'01
06'01
06'00
12'99
4.0
12'00
4.5
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Continuing acceleration of inflation in H1’05
Consumer prices, annual % change
Producer prices, annual % change
Index of Inflationary Expectations (right scale, max = 200)
25
200
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Q4'06
Q2'06
140
Q4'05
-5
Q2'05
150
Q4'04
0
Q2'04
160
Q4'03
5
Q2'03
170
Q4'02
10
Q2'02
180
Q4'01
15
Q2'01
190
Q4'00
20
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What kind of regional policy
is optimal for Ukraine?
Oksana REMIGA
Symptoms of regional policy problems
• Interregional development gaps are growing
over time
• With the exception of the capital, no region is in
the lead according to basic indicators
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Relative ratings of regions compared
to national average
1.6
Kyiv (1,4;3,2)
2001
1.4
Donetsk oblast
1.2
Dnipropetrovsk oblast
Poltava oblast
Odesa oblast
Zaporizhzhia oblast
1
0.4
0.6
0.8
Kirovohrad oblast
Sevastopol
Ivano-Frankivsk oblast
V olyn oblast
Zakarpattia oblast
1
V innytsia oblast
1.2
Kharkiv oblast
Kyiv oblast
Mykolayiv oblast
Luhansk oblast 0.8
1.4
1996
Sum y oblast
Chernihiv oblast
Rivne oblast
ARC
Cher kasy oblast
Khm elnytsk oblast
Kherson oblast
0.6
Zhytomyr oblast
Ternopil oblast
Chernivtsi oblast
L'viv oblast
0.4
Міжнародний центр перспективних досліджень
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1.6
Budget contributions not proportional
to regional economic development
UAH per capita
16000
14000
GVA per capita
12000
10000
Tax and fee revenues of budgets and state
targeted funds (right scale)
8000
6000
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
The city of Kyiv
Donetsk
Dnipropetrovsk
Poltava
Zaporizhia
Odesa
Kharkiv
Kyiv
Mykolayiv
The city of Sevastopol
Sumy
Luhansk
L'viv
Ivano-Frankivsk
Chernihiv
Kirovohrad
Vinnytsia
Crimea
Rivne
Volyn
Kherson
Khmelnytsk
Cherkasy
Zhytomyr
Zakarpattia
Chernivtsi
Ternopil
2000
0
Ukraine
4000
5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
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High economic development
not equal to high quality of life
Region
GVA per
capita
(2002),
UAH
Share in
National
GVA
(2002), %
2003 Human
Development
Index,
rank
1. Kyiv
13,456
17.2
1
2. Donetsk oblast
5,263
12.4
26
3. Dnipropetrovsk oblast
5,090
8.8
24
4. Poltava oblast
4,825
3.8
3
5. Zaporizhzhia oblast
4,498
4.2
16
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Cluster analysis
of regional development
• An alternative to grouping regions by location
• Reveals problems and development prospects
specific to a group of regions
• Confirms systemic problems in regional policy
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
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Groups of oblasts
with common development features
•
•
•
•
The City of Kyiv
Dnipropetrovsk, Luhansk, Zaporizhzhia, and Donetsk
Kherson, Kharkiv and Mykolayiv
Crimea (including Sevastopol), L’viv, Odesa, and
Zakarpattia
• Sumy, Poltava and Ivano-Frankivsk
• Volyn, Chernivtsi, Ternopil, Rivne, Khmelnytsk, Kyiv,
Vinnytsia, Zhytomyr, Kirovohrad, Cherkasy, and
Chernihiv
Міжнародний центр перспективних досліджень
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Systemic problems
with regional policy
• Lack of clear goals
• Excessive centralization
• Ill-defined role of national and regional
governments
• Ineffective means for supporting regions with
development problems
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Regional policy goals
Overall national well-being
versus
Interregional equality
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
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Key regional policy tools
• Special investment regimes—free economic zones
• Inter-budgetary equalization mechanism
• Sectoral programs allocating financial resources
to support depressed areas
• Centralized investment in socio-economic regional
development
• Support for socio-economic development in the
mountain regions
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
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Principles of reform
• Decentralization, with clearly defined areas of
responsibility for national and local governments
• Active engagement of local governments in
developing and implementing specific policies
• Clear criteria for identifying troubled areas
• Reasonable time limits for allocating government
support
Міжнародний центр перспективних досліджень
International Centre for Policy Studies
Tel. (380-44) 236-4477
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Thank you for your
attention!
Consequences of the
political crisis
Results for 2004
Forecast for 2005–2006
Press conference
International Centre for Policy Studies
20 December 2004