Transcript ukraine_outlook_july_2015x

Ukraine
Business outlook 2015-18
Quarterly update – July 2015
by Dr Daniel Thorniley
Content
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Executive summary
How senior executives see things
Some assumptions
Key factors
Business outlook
What are Ukrainian companies saying?
Business features
Human resources and salaries
Bad blood?
Where do you put Ukraine in your structure?
The latest IMF deal and debt restructuring
Economic outlook
Inflation outlook
Currency outlook
Ukraine - statistics
Executive summary (1)
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Executive perceptions changed negatively in late autumn last year and February this
year as “reality-checks” hit hard
Business will for most companies be very bleak this year and most predict only a mild
recovery next year
It is still remarkable that a handful of companies report good business in hryvnia and
even not bad business in FX (we discuss possible reasons below)
Recent economic indicators suggest that possibly the very worst may be over; for
example with the exchange rate and inflation but there is no naïve optimism
We presume there will be no further military escalation and that the Ukraine-Russia
conflict will settle into a messy, nasty frozen conflict that does harm to both countries
If there were any intense escalation of fighting in eastern Ukraine, the economy could
implode for 3-6 months
Cross border trade is being hampered: some Russian regulations are blocking Ukrainian
exports into Russia while some western companies are no longer supplying Ukraine
from Russia. This is not a complete freeze on cross border trade but does indicate that
the trend is in the wrong direction
Executive summary (2)
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The IMF has finally done the right thing and provided financial support even when
the debt negotiations with private creditors have not been finalised
Putting Ukraine “on the hook” to obtain by itself some $10-15bn in debt write-offs
from stubborn private creditors was and is a bizarre and untenable position for the
IMF and EU representatives
Support from the IMF and international institutions still seems insufficient
2015 is going to be a tougher/worse year than 2014 because it will not have the
relatively good/moderate start that 2014 experienced: in fact just the opposite as
the first half of 2015 will be worse than the second half
economically there are the very first signs of some stabilisation and equilibrium at
deflated levels: but the good news is that several indicators did not deteriorate
further in May-June after slumping badly in the first quarter of this year
Executive summary (3)
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The government’s own worst case for GDP this year is -12% versus our central forecast of
minus -9.4%
The Ukrainian government's best case is -6.8%, mid-case is -9% and worst case -12%
The free-float of the hryvnia in February saw the currency collapse further and then rally
somewhat
But the official numbers for the exchange rate do not reflect reality and for companies and
citizens, even when they can exchange hryvnia, the effective rate is often 15-20% worse than
the official figure
Top-line Inflation surged to over 61% in April after the currency collapse and as gas prices
were liberalised (by 800% in April) but the June figure decelerated to 57%
Core inflation (excluding food and energy prices) was only 40% in April
Top-line inflation will average 45% this year and be down to 16% in 2016
High inflation and weak currency are feeding off each other with blow-back effects on the
economy
If there is further compromise militarily, then there is always the possibility even of some
strong positive upside on the FX rate which would run through positively into business
results. But this seems unlikely for now
Executive summary (4)
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Maybe the political and military outlook is stable or better (maybe) BUT the economy is
now experiencing the deeper negative impacts from the 2014 crisis year and recession
is kicking in deeper now with soaring inflation
We predicted that the start of 2015 was going to be bleak for the Ukrainian economy
and sadly this has happened
The short-term outlook is fixed and will be bad as the existing negatives will affect the
economy and business at least for the next 4-7 months no matter what happens
A very mild economic recovery ought to kick-in late autumn or year-end 2015 with
positive GDP of about 1.4% in 2016
If politics and military situation stabilises and improves and if IMF/EU financing
continues, then the bounce-back could be accelerated by a few months and the jump in
GDP growth in 2016 could rise as much as 3-5%, but this is NOT our central forecast.
We then see GDP trending later at 4% in 2017-2020
Executive summary (5)
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It is important to note that executives in our Surveys do not expect or budget for any strong
bounce back in 2015 and then only a mild, moderate one in 2016
Ukraine will be the worst performing market in the CEE and CEEMEA region for sales and
profits in 2015 and one of the worst in 2016 although the second half of 2016 ought to see
business recovery
Plans and forecasts are rightly very conservative. One should plan for an economic and
business recovery starting very slowly in autumn 2015 (at best) and only picking up through
2016
Much of the business outlook will depend on the FX rate and there are divergent estimates
for this in 2015 and 2016
We are slightly more negative than the consensus which expects average levels to the US
dollar of about 22-24 to the dollar in both 2015 and 2016. This level is similar to the current
July rate or even slightly better
We see the hryvnia somewhat weaker at an average of 26 this year and 28 next year
Risks though and volatility could be quite extreme both to the up or downside
How senior executives see things (1)
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The local MD of a major consumer product firm: “We were seeing a further 50%
drop in the Euro top-line and some weeks ago I thought it would be worse but the
currency stabilisation has helped a little. But the numbers are still very bad”
Another MD in the same sector confirmed: “We could see top-line sales fall by 1025% this year and any consumer resilience could collapse this year compared with
some relative support in 2014. I am also seeing the start of a collapse in premium
products (which is not surprising) but the speed of the move to value and
discounts is extreme now. We and other companies are losing share now to the
discounters as the Ukrainian consumers move en masse to the bottom. We see
only a small recovery taking shape this year and only perhaps in spring 2016”
The MD of one industrial company noted that: "We are obliged to take more
severe steps regarding costs and we will be slashing most operational costs and
cutting deep into the corporate structure. I could protect most of the staff for a1215 month period but the demands of European headquarters are now too severe.
We will cut staff by 25-40% in the coming months”.
How senior executives see things (2)
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“Given the cold bath that we and other companies took last year on profits, cost
management is now “Scrooge-lie” and we are expected to stay in the black this year. To
achieve this we will probably exacerbate our worsening market share position”
Comment: we are seeing similar concerns being raised in Russia where other managing
directors fear that an over-obsession with profit management will threaten to damage
market share the long-term perspectives of the business
One of the executives commented on a well known feature regarding exchange rates: “The
average and spot rates bear no resemblance to the actual FX rates we can attain assuming
the purchase applications are approved in the first place”. Liquidity is very scarce for Euros
and a little better for dollars and the actual rate is 10-15% weaker than the published, official
rates. The National Bank rates are not achievable which depresses our profitability and cashflows further and means we have to explain these details to European-based corporate
finance colleagues who ask rationally “What’s going on with your FX rates?. There has been a
modest FX improvement in recent weeks and let’s see if that proves sustainable. Every little
bit helps but we will be hunkering down for the next 9-15 months for sure”
This executive did note the important point that: “We have to be ready though for whenever
the market turns round and that could be sometime in 2016”
How senior executives see things (3)
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Several companies have had internal debates about how to invoice and on what terms. Some
companies feel that they cannot continue with FX- denominated invoices and need to get
more localised and absorb some risk themselves. Conversely finance directors in Europe are
extremely cautious about doing just that. Some companies compromise by invoicing in FX but
by using special and agreed exchange rates
All this is a challenge as we note below that Ukraine reports the worst receivables situation in
the CEE region
But not is all bad news
The regional director of a global apparel brand stated last week in Moscow that: “Our
Ukraine business is remarkable. We are up 70-80% in hryvnia which means of course that we
are solid in FX when we combine that with some price rises. To be able to stay steady in FX
when the currency collapsed and inflation shot through the roof is quite special”.
The regional MD of one industrial conglomerate also noted: “Our sales are up 50% in local
currency and some how our customers find money some where. They have been able to
protect their previous FX earnings and not turn them into hryvnia. To be honest I don’t ask
them where they get the Euros and we continue a reasonable business against this
frightening background”
Some assumptions (1)
We stick with the following features of our central scenario:
• Crimea has seceded de facto from Ukraine
• This will not be accepted by Ukraine or the West and will remain a frozen conflict
• The conflict with Russia will not escalate or worsen from here
• The entire Donetsk and Lugansk regions (not just separatist bits) are 18% of Ukrainian
GDP and 23% of industrial output. But the separatist parts are smaller than this
• Any eventual agreement will not prevent a future poisoned atmosphere remaining
• IMF/EU funding will have to be increased in order to rebalance the debt profile
• Ukraine will have to restructure or write-off part of its sovereign debt in 2015
• But any variant of the IMF program will entail structural reforms which in the shortterm will hurt GDP growth, consumption patterns and western business results
• The key to success is for any new regime to tackle genuinely and seriously endemic
institutionalised and socialised corruption and malpractice
• Yanukovich’s kleptocracy has destroyed the commercial fibre of the country
Some assumptions (2)
Our economic assumptions for 2015 include:
– GDP shrinks by -9.4%
– Consumer prices rise by 51% on average trending downwards in final months of
year
– High inflation will crush real wages by -33% to -45% this year
– Consumer spending will decline by at least -11.8%
– Investment will decline by -18% and is currently down minus 25-30%
– The currency is following the path we predicated i.e. deep crash and with IMF
support some stabilisation. It is just possible that the very worst may be over on
the currency front as well as on the inflation side of things
Key factors
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The Ukrainian economy and business was coming under downward pressure in any case prior
to the demonstrations on Maidan and prior to events in early March
The economy was steadily deflating from a massive economic bubble
At the turn of 2012-2013, Ukraine was reporting some of the highest retail sales and highest
real wages in the world in some cases surpassing figures in China
This was clearly unsustainable and while the average numbers for these indicators held up
moderately well in 2013, the year-end figure (and the real trend) showed a negative picture
Surprisingly some companies reported their business holding up reasonably well into JuneSeptember this year but this cannot continue with spiking inflation
This can be attributable to consumers buying up products in December and the first months
of 2014 fearing an economic collapse and a spike in prices. Such buying made logical sense
We should always be aware that especially in the Ukraine the real sales of companies can
belie official figures
This is because so much economic activity takes place in the grey and black economies
That said, the economy and business outlook is for a very cold shower for the next 6-9
months and even revenue in the black economy will not provide sufficient compensation
Business outlook (1)
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Many companies were surprised that they survived the first 6-7 months of 2014 in
reasonably good shape as consumers stocked up, “buying against future inflation” and
“investing in products” rather than holding on to cash and these were wise measures
By autumn 2015 harsh reality had sunk in for the huge majority of companies and the start of
2015 has seen some brutal business trends with only small islands of decent business or
small niches
There has been recent currency recovery and the peak of inflation may have passed
There are some key points for 2015:
1. Ukraine will be the worst performing market in the CEEMEA region excluding only Syria
2. Business results will depend on the FX rate and that will depend in part on inflation and the sovereign
debt outlook and the extent of EU/IMF support. This was very bleak/disastrous in February-March. But we
have seen the first signs of some stabilisation
3. Executives turned much more pessimistic in February and have since seemed slightly more upbeat in the
last 1-2 months
4. There is a growing East-West division in sales with more companies reporting relatively better sales in Kiev
and the western regions compared with weak current and future sales outlook in the East and South of
the country. This was the case to the start of spring 2015 but all regions are trending downwards now.
Perhaps the relative strength of the western market will remain.
Business outlook (2)
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In terms of forecast organic sales growth in 2015 Ukraine ranks bottom of our Survey of
23 CEE markets
Currently 15% of executives predict flat sales in hryvnia in 2015 and hefty 53% look to
negative hryvnia sales growth while 15% predict single-digit growth and 18% forecast
double-digit sales increases presumably from recent deep lows
If the hryvnia is falling further this year, then of course even such “sales growth” is
massively poor in FX terms
But there is a possible positive scenario: some companies could be seeing their hryvnia
sales rising this year and if there is stabilisation or mild appreciation of the currency,
then sales in FX could start to look at least acceptable
That’s the potential good news
And to some extent this has started to happen in late spring
BUT companies will not have been able to raise their prices sufficiently to bridge the FX
gap and also companies will probably have accounted for a stronger exchange rate in
their budgets and forecast
So, any FX bounce back is positive but unlikely to be sufficient to help the FX corporate
results so much This would help shorten the length of the economic crisis but would
not prevent it
Business outlook (3)
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But executives are planning for an eventual mild recovery even if they are pushing
back the date a bit: some weeks ago many predicted that the economic and
business rally would kick in from late autumn 2015 running through 2016 when
GDP growth in the latter year could rise to 3-4% range and bring business along
with it. But such expectations have been postponed more to year-end and the
GDP outlook from 2016 is now down to just 1.4% growth on middle scenario
But current “mini-signs” suggest that the economy could be helping in 2016
Executives are forecasting better sales in local currency and if the hryvnia can
stabilise over the next 18 months, then corporate results could prove “ok” in 2016
in hryvnia and then also in FX
Currently companies across all sectors forecast the following sales growth in 2016:
19% still expect negative sales, 30% forecast flat sales growth while 32% budget for
single-digit sales and 13% look to double-digit sales
As with sales in Russia now, all depends on that exchange rate and how much you
can raise prices to match local and FX sales
Business outlook (4) – 2015 sales projections
Latest 2015 sales projections main CIS markets (in local currencies)
Growth of 10%+
Growth of 5-10%
Growth of 1-5%
Zero growth
Decline 1-10%
Decline of 10%+
Russia
35%
20%
14%
9%
11%
9%
Source: Business Russia/CIS Group Surveys
Ukraine
18%
8%
7%
14%
31%
22%
Kazakhstan
27%
28%
11%
23%
11%
0%
Belarus
27%
16%
11%
28%
16%
1%
Business outlook (5) – sales by sector
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Some 26% of consumer goods companies this year look to negative sales with 36% clustered
around flat sales but then 27% predict single-digit growth and 12% look to double digit sales
expansion. These figures for 2015 are better than estimates made for 2015 some 6 months
ago
This may stem from “natural” bounce back because inflation and real wages are going to do
few favours this year
However, the estimates for 2016 for consumer products are noticeably stronger with 30%
predicting double-digit sales; and another 28% forecasting single-digit sales increases with
another 30% expecting flat terns and only 7% estimating negative sales
B2B is relatively much worse this year and Ukraine ranks bottom of 23 markets in this sector
with fully 87% predicting negative sales and 13% flat growth
These figures follow a deep recession in 2014 but will depend on inflows of financing and
local bank restructuring
B2B sales are under more pressure because of the lack of financing and we fear that this
sector and IT will take a huge hit in the coming months and our survey results have
substantiated this
Business outlook (6) – sales by sector
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Obtaining finance for B2B sales is becoming immensely difficult and often impossible and
hence why sales will fall by -25% to -45% for many companies in B2B and the IT sectors this
year
Some B2B firms report that they are able to make some sales to companies that still have
“grey financing” or are able to export their products. B2B sales are also tending to perform
better in Kiev and the West of the country compared with weaker sales in the East
The IT industry was already struggling badly and executives in this sector and others are
talking more frequently about bad debts on receivables
The depth of the crisis is seen in the fact that even the usually resilient pharmaceutical sector
is under tsarina and again Ukraine ranks bottom of our 23 surveyed markets
This year 51% of firms predict negative sales and 8% flat growth while one quarter look to
high-single digit increases
The latter probably comes from some life critical government tenders and some from
pharmacy (OTC) sales
A moderate recovery is predicted in 2016 and Ukraine rises into the top 10 markets for sales
growth with 36% seeing flat outlook but 27% in single digits and 18% bouncing back in
double digits
What are Ukrainian companies saying?
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Other trends among Ukrainian companies are a little worrisome: some western partners
have reported that these firms do not want to have anything to do with Russian partners
working with the western company: “One Ukrainian managing director told us he didn’t want
any third party links with Russians and he didn’t want any Russian supplies in the deal. All our
activities and even travel had to stem from the West”.
But nothing is fixed: some Ukrainians say “Business is business and we will always work with
Russian companies and we are obliged to. We’ve known each other too long to let stupid
politics get in the way”.
One Italian manufacturer alluded to some western firms being over-protective: “The
Ukrainians wanted to buy processing equipment and the German company executives
refused to fly to Kiev (not Donetsk!). This company sent some Dutch junior executives and
the Ukrainians basically told them to go to hell. We said we would do almost anything for the
business and we got the contracts”.
As we have noted above though, increasingly there are formal and informal trade restrictions
across the border or local parties in Ukraine and Russia do not want to receive
products/inputs from the other country. This is not sweeping or comprehensive but a
growing marginal issue
Business features (1)
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As we would expect, on most business indicators Ukraine features close to the bottom
of the 23 markets we survey twice each year and this includes sales and profits where it
ranks the worst in the region for 2014 and 2015 but climbs up to 19th in 2016
Western companies will make longer-term plans for business development in 2016-20
This is reflected by the remarkable fact that 17% of companies rate Ukraine as a priority
market in the next 3 years
This is a multiple answer in the Survey in question and so the total is above 100%: for
comparison 79% rank Russia, 44% Poland, 39% Kazakhstan and 27% Turkey
Given the question relates to just a 3-year time horizon, this is surprising and suggests
that some companies will be looking to get back into the market and be prepared for
any possible bounce back in 2018
But Ukraine also ranks joint-first with Russia for companies planning cuts in
marketing/sales at 31%, whereas in core CEE markets this number is only 12-13%
Some of the cuts already made have been fairly substantial with almost 30% of firms
cutting back by 30% or more on marketing and sales activity
Business features (2)
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When it comes to changing route to market, Ukraine ranks second behind Russia with 28% of
respondents referring to this trend. In the past it was a high ranker because companies
wanted to diversify their distribution in a big, growing market. Now companies are simply
hunkering down and cutting back on distribution costs
As ever in any crisis, best practice here see companies maintain as good relations as possible
with the supply chain because western players will need them again in the medium term and
local distributors will remember how they are treated in this crisis
Not surprisingly, Ukraine ranks worst for growing issues with receivables and bad debts with
55% facing such problems ranging from delays to likely future write-offs
Given that the crisis is set to continue through most of 2015 and into 2016, we presume that
increasingly more local companies and partners will need some kind of debt write-off and
some will go under
Cash management was and remains critical and corporate debts will almost certainly rise as
the banking system comes under increased pressure
Our survey also substantiates anecdotes regarding downtrading and with inflation spiking
and wages slumping, Ukrainian consumers will downtrade, look for value and discounts,
make less frequent purchases and stress all products to delay renewal purchases. Ukraine
ranks second behind Russia with 51% of companies noticing this trend
Human resources and salaries (1)
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Generally companies are/were trying to retain staff and keep salaries in tight control
But as the market worsens, further headcount reductions and this situation is
intensifying through the first months of 2015
Last autumn 40% of companies had already started to make staff cuts but many stated
that such cuts were marginal
But as the market deteriorates and the hryvnia falls further and as the start of the
recovery is pushed further back and as headquarters lose patience and demand profit
stabilisation or even profit growth, then local managers are faced with deeper and
accelerated staff cuts
One CEE regional MD noted this last week: We have been able to retain nearly all staff
in Ukraine and just a bit of natural attrition. I could keep this situation going for a 12-15
month period after the Crimea incident last March. But now annual numbers are kicking
in and there is no place to hide. Regrettably, we will have to let 20-40% of the staff go as
there is simply no business or certainly only massive profits losses and not much sign of
any profit recovery soon”.
Human resources and salaries (2)
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Another regional MD of a B2B company echoed this: “We will be obliged to let 20
people go in the coming weeks. There is a bit of mini-recovery but it’s tiny and at hugely
deflated levels. I am, for what it’s worth, telling our local team to inform people that
they should stay in touch and hopefully in 9-15 months we could be hiring again”.
Most companies (70%) are not making any salary increases to compensate for the
hryvnia depreciation.
As the business recession proves more long-lasting, we imagine that the majority of
companies will continue to refrain from such compensatory payments
In 2015-16, with the longevity of the recession, companies will ensure that any salary
increases remain significantly below inflation
Of course if the hryvnia stabilises and inflation as an average stabilises or even falls,
then local staff will feel much better-off but in the coming 6 months the salary outlook
is very tough for employees in western companies, in Ukrainian ones and within the
civil service and state sector
Then again, many will be glad to hold on to their job with a western company and be
willing to wait for a rally in 2016
Bad blood?
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There are no moral, value judgments in the following remarks, just business analysis
There are mixed messages from companies regarding bad feelings and break downs
within teams among Ukrainian and Russian staff
Several western managing directors told me last week that, “We are seeing serious
tensions and break downs of relationships among our Russian and Ukrainian staff and
this is a real tragedy”
A few companies have started to take Ukrainians out of Moscow offices and Russians
out of Kiev at the request of their staff; no one is being obliged to transfer
The numbers from our survey are as follows:
– 68% of companies spot heightened tension and 32% do not
– 83% are NOT transferring staff while 17% are doing so
All this has consequences for promotion and succession planning and could turn into a
serious medium-term HR problem
Conversely several western executives told me this last week that, “Tensions are
actually quite minor (or below the surface)”
So in summary, some disconcerting trends for sure but also not exclusively bad news.
But also quite sad and depressing
Where do you put Ukraine in your structure? (1)
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Firstly, whereas in the past many companies had structural links between their Kiev and
Moscow offices or dotted lines even when formal links were detached, this will
“presumably” disappear as Ukraine is detached organisationally from Moscow reporting
lines
But many companies have a vested interest in keeping a CIS structure including Ukraine
and do not want to disrupt a working structure which is also convenient
In our latest survey (surprisingly to me), 46% of companies are retaining a CIS structure
with Ukraine while another 22% do so with Ukraine “more autonomous” within that
structure
“Only” 32% are taking or have taken Ukraine out of the CIS structure
One MD for the CIS region explained to me in powerful detail all the rational and
commercial reasons why Ukraine should remain in the structure include trade ties,
customs regulations, legislation, practicality, synergies etc.
But conversely the senior partner of major service company commented in London last
week that: “There were many synergies but frankly many of these are disappearing”
Where do you put Ukraine in your structure? (2)
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We are also witnessing increasing pressure from Ukrainian-based executives
demanding to be detached from any structure which contains Russia
Our assumption is that with a cease-fire in place and hopefully the shooting war at
an end (this is not a certainty) that as “things calm down” , then companies will
not tamper with their structures and leave things alone
On the other hand, pressures from the Ukrainian business community should
ensure that at least some companies start to detach Ukraine from their CIS
structure
Some increasing trade difficulties across the Russo-Ukrainian border in both
directions (not yet systemic) could undermine mutual business and act as another
reason to create separate corporate structures
The latest IMF deal and debt restructuring (1)
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The numbers for international assistance to Ukraine sound good but in fact they are not
On 11 March the IMF approved a 4-year assistance program of $17.5bn under the so-called
Extended Fund Facility (EEF). The new program replaces an earlier two-year program of
$17bn (of which some $5bn were disbursed)
In fact $15bn of the $40bn package is predicted to be saved (by 2018) in on-going debt
negotiations: so 40% of the total support is presumed to come from debt restructuring which
as we noted several months ago was extremely optimistic or fanciful
Furthermore the $40bn headline number includes supposed financial aid from a batch of
sources including international organisations, the EU, the EIB, the EBRD and the World Bank
amounting to $7-10bn of the total (another 20% or so of the total)
Thus almost 60% of the total looks a bit like “funny money” or will only come in dribs and
drabs (little pieces)
In fact by mid-June the Ukrainian government had not reached a resolution with its private
creditors but the IMF went ahead with the next tranche of $1.7bn under the EFF
The latest IMF deal and debt restructuring (2)
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As with negotiations with Greece, the stumbling block relates to a haircut of the principal
private debt (total of $23bn) which creditors refuse to accept preferring instead an extension
of the maturity
With the IMF stepping in to disburse the latest tranche despite the technical possibility of
default, the negotiating position of the Ukraine government is certainly strengthened
There is another interest payment deadline on 24 July and this will be used by the IMF to
exert pressure on private creditors but they may not capitulate this month
Our central scenario is that a deal with private creditors will be reached by 23 September
when Ukraine faces the maturity of $500mn Eurobond
The government also has an outstanding $3bn Eurobond held by the Russian government
which matures in December this year and our assessment is that for all sorts of financialtechnical reason that this bond will be repaid
FX reserves doubled to $10bn in March as the IMF disbursed its first $5bn tranche and also
thanks to some improvement in the current account due to sharp cuts in imports
Thanks to better tax collection we expect the budget deficit to improve to -3.9% this year
from -4.6% last year
Economic outlook (1) - GDP
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GDP this year will be weaker than in 2014 and any recovery in 2016 will be mild: GDP
will fall this year by -9.4, after -6.8% last year and then will rise by about 1.4% in 2016
The government’s own worst case for GDP this year is -12%
Annual average indicators for 2014 by the way appear “not too bad” but all these
indicators were on a steeply declining curve through the year and year-end numbers
were worse than the annual averages
As we predicted, all indicators will continue to fall through the first 9 months of 2015
But by May-June we have seen the speed of the collapse decelerate and actually
improve a tiny amount
But there is little chance of a strong bounce-back recovery in 2016 as the challenges are
more fundamental; 2016 will see only a mild recovery
A significant improvement in eastern Ukraine would create a “best case outlook” but
we are already in June 2015 and even an “over-night sensation” would not be able to
turn around the 2015 picture quickly enough: 2015 will be bad in almost any scenario
It is too alter to much improve the 2015 numbers
Economic outlook (2) - GDP
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The drivers of weak growth are well documented: the military conflict in eastern
Ukraine, the collapse of the economy even prior to the Crimean events as the
Yanukovich economic bubble deflated, rising debt levels, IMF-imposed austerity
measures, collapsing domestic investment, virtually zero western corporate investment,
overall economic downsizing, spiking inflation getting close to 50% and consumer
incomes and wages among the worst in the world after being among the highest in
there world just two years ago
In addition the new coalition government is not inspiring confidence in the
international community and among western companies operating in the country;
admittedly it faces a huge task and is an improvement on the pervious regime
We make the presumption that there will be no further escalation in eastern Ukraine
otherwise our estimates will need to be revised downwards
We also assume that the gas deal will flow at an agreed price around $365-380, a
number higher than previously but also just below open market rates i.e. some sort of
compromise
Economic outlook (3) - GDP
•
•
•
•
•
•
Gas prices are set to rise by 1,000%+ over the next two years and this will inevitably hit
consumers and corporations
But we also know that there is scope for better efficiency in energy usage so there is
some compensation here
With spiking inflation and tumbling real wages and the shrinking hryvnia, there are
estimates that GDP per capita will fall to just $1,500 from $4,000 in 2012 (denominated
in dollars of course)
In theory the falling hryvnia ought to help Ukrainian exports but there will be little help
from a recessionary Russia and a still weak (but improving) Eurozone
Exports collapsed -23% in 2014 and still look set to decline a further -15 to -20% this
year before recovering by 5.0% in 2016; imports fell -30% last year and will be still
negative this year by at least -18% and then increase by 5.5% in 2016
With collapsing domestic confidence, little foreign investor interest, no access to capital
markets for long-term investments and still elevated political and military risks and
rising credit risk, it is little wonder that the collapse is being led by investment and
particularly with no Russian inward funds for the near-term future
Economic outlook (4) - GDP
•
•
•
•
•
•
•
•
•
Fixed investment was down -25% in the first 5 months of 2015 (after -23% for all of 2014) and
we estimate at best case this year of -18.0% and then reverting to positive 2% next year and
at 5% in 2017-18 as the economy does experience some bounce-back effects
Industrial output fell -4.3% in 2013 and then slumped -11% for 2014 and through the first 5
months of this year the decline has been -20%
These are all the worst figures since 2009
But we do expect some improvement in the coming months as average industrial output will
“only” fall by -16% this year and then turn positive in 2016 by 3%
Inventories have been slumping through all of 2014 and into 2015
The only major positive in 2014 was agricultural output but so far this year the sector is down
-7% although the prospects for a good grain harvest still exist with possible decent exports
These trends in industry and investment inevitably mean that B2B sales and profits will be
damaged this year and this is what executives are expecting
And finally the construction sector in the first 5 months of this year is down -32%
Cargo transportation was down by -9% last year but has recently collapsed by -22% in the
first 5 months of 2015
Economic outlook (5) - wages
•
•
•
•
•
•
•
Nominal wage growth and real wage growth (after inflation) in 2010-2012 were among
the highest in the world and certainly the highest in Europe
But these were already trending downwards from +20% in 2010 to +17% in 2011, +15%
in 2012 and +7.9% in 2013
But real wages have faced a catastrophic collapse in 2014 and through into 2015
As inflation jumped to “only” an average of 12% last year, real wages fell by -4% as
nominal wages started to soften
But with nominal wages fluctuating in a range of 8-13% last year and 12-22% this year
as inflation leaps to 50-60%, then real wages are been destroyed by -30% to -40%, one
of the worst figures in recent global history
It seems the peak of inflation may have been hit in April at 60.9% and as prices decelerate,
then real wages in 2016 will improve but still be in negative territory at minus -4.8% before
turning positive by +3.0% in 2017
Real wage trends will hurt consumer confidence and ensure that retail and household
expenditure will drop downwards sharply as they did through the first half of this year
Economic outlook (6) – retail/consumer
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•
•
•
•
•
•
•
Retail sales followed the pattern of wages bouncing around at +17% in 2012 but was already
down to 8% in 2013 and last year they turned negative at -9.5% on downward trend (without
the positive start to that year they could have been much worse)
Retail sales were down year-on-year by over 30% in March and at -25.6% in may; the average
for the first 5 months of the year is minus -25%
Such sales are slightly better than the inflation and real wages figures because consumers can
turn o savings and income from the black economy which represents at least 40% of official
GDP
As inflation decelerates, we expect retail sales to rise by 3% in 2016
Total household spending will fall by -12% his year with downside risks after a fall of almost 10% last year and we then see a rise of 1.3% next year
Consumer confidence has averaged 80-82 in the last two years with a recent low of 70 in
early 2010 after it had collapsed disastrously to 40 in early 2009 for a few months
But through the first half of this year, the worst numbers of 2009 have been matched with
the indicator hovering at 41 in April with a tick-up in May to 46
Unemployment averaged 10.5% last year and we think this could tick up to 12% this year as
companies make tougher decisions
Inflation outlook
•
•
•
•
•
•
•
Inflation slid negative in 2013 at -0.3% and averaged 12% in 2014 on an upward curve at
25% by December
But the flow-through effects of the crumbling currency combined with a 800% hike in
gas prices in April and the impact of sizeable monetary financing of the budget deficit
(printing money) ensured that inflation leapt to 60.9% in April averaging 45% in the first
half of 2015
As we anticipated, it took a month or two for inflation to then start what will probably
be a steady deceleration: price had improved to “just” 57.5% in June for example
Inflation was up across the board with food and utility prices all impacted as well as
imported items; producer prices were also elevated as the prices for chemicals, coal
and sugar soared
In fact while top-line inflation was touching 60%, core inflation (excluding volatile food
and energy prices) was “only” 40%
We expect prices to decelerate further through the second half of his year as the
hryvnia stabilises or stops crashing and inflation to average about 45% on a downward
trend and year-end inflation (December 2015) could reach 25-30%.
Inflation is expected to average about 16% next year
Currency outlook (1)
•
In the second half of 2013 the hryvnia was stable against the dollar at 7.87 and
averaged 11.0 to the Euro in the first half of 2014. It then moved as follows:
1 Jan 2014
16 March
12 October
1 January 2015
1 March 2015
8 July
•
•
Dollar
8.03
9.03
12.7
15.6
28.6
20.7
Euro
11.0
12.77
16.1
18.9
32.3
23.2
In the first quarter of 2015 the currency virtually halved in value against the dollar and
fell by 78% against the Euro; the difference is obviously explained by the strengthening
of the US dollar
The February free float caused the currency collapse but then we witnessed some
moderate recovery thanks to 1) some FX controls 2) some stabilisation in eastern
Ukraine and 3) and the announcement of the IMF program and proposed negotiations
with private creditors
Currency outlook (2)
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•
•
•
•
•
•
•
•
There is a wide range of estimates for the FX rate this year and with some significant outliers
Much depends on political/military risk and also on the debt negotiations
The consensus for the average dollar/hryvnia rate in 2015-16 is in a range of 23-26
But some commentators predict a much sharper fall back down to 30 i.e. worse than its
recent march 2015 level while some experts foresee very strong strengthening to 16-18
We do see the positive current trends of decelerating inflation but at still very high levels and
a variety of government polices and IMF support have restored the currency
But with a severe recession this year and with possible downward pressure on all emerging
market currencies as US interest rates climb, we estimate a somewhat softer FX rate than the
consensus in the next 2-3 years
Our estimates of the FX rate versus the dollar averaging 26 this year and reaching 30 by 2018
suggests a further depreciation of 13-20% in the next 9-24 months rather than the more
upbeat view of stabilisation
We stress that nearly all the risks are to the downside
However, if the market mood changes, then a strong appreciation could set in, as we have
seen with the Russian rouble recently
Currency outlook (3)
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•
•
•
•
But much will depend how long the current inflation spike persists and whether
the annual average for inflation settles around 45% (our central view) or whether
it improves more quickly or stays sticky
Bank interest rates remain nominally high (at 30%) but this is well below inflation
levels, although on the other hand real market rates are much higher
We do expect rate cuts of 3% in 2015 and a further 9% next year as inflation
decelerates
FX reserves tumbled as the currency weakened and slumped to a recent all time
low of $5.5bn in February but thanks to IMF support have rallied to $10.3bn in
June
We presume for calculation purposes that the Euro/dollar will fluctuate at about
1.09 for the next 12 months but there is some risk that the dollar could rise to
1.00/1.05 range in the next 6-9 months
Ukraine - economic outlook: statistics
GDP
Fixed investment
Industrial output
Household spending
Government spending
Real wages
Retail sales
Consumer prices (average)
Budget deficit (% GDP)
Current account (% GDP)
Exports
Imports
Hryvnia/Euro (average)
Hryvnia/dollar (average)
Unemployment (%)
2012
0.2
0.9
-0.5
9.1
3.6
13.5
17.4
0.6
-3.8
-8.2
-6.0
1.9
10.5
8.08
7.9
Note: Real annual % change unless stated
2013
0.0
-6.6
-4.3
7.8
2.7
7.9
8.0
-0.3
-4.4
-9.3
-8.0
-6.0
10.7
8.1
8.7
2014
-6.8
-23.0
-11.0
-9.6
-5.0
-4.0
-9.5
12.5
-4.6
-3.8
-23.0
-34.0
15.7
11.9
10.5
2015
-9.4
-18.0
-16.0
-11.8
-4.0
-38.0
-17.0
45.0
-3.9
-2.7
-15.0
-20.0
27.5
26.0
12.0
2016
1.4
2.0
3.0
1.3
0.8
-4.8
3.0
16.0
-3.7
-2.5
6.0
7.5
30.0
28.5
11.0
2017
3.6
5.2
4.5
3.0
1.4
3.0
3.7
8.6
-2.8
-2.9
8.0
7.2
31.0
29.5
9.8
2018
4.5
5.8
4.8
3.7
1.4
3.2
4.7
7.5
-2.8
-4.0
8.2
7.8
32.5
31.0
8.5
© 2015 CEEMEA Business Group*
*a joint venture between
DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria,
Company registration: FN 331137t
and GSA Global Success Advisors GmbH, Hoffeldstraße 1, 2522 Oberwaltersdorf, Austria
Company registration: FN 331082k
Source: DT-Global Business Consulting GmbH and CEEMEA Business Group research
Basic data sources come from central banks, own intelligence network, CEEMEA Business Group
corporate survey, governments and other public sources. Interpretation, views, forecasts, business
quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group.
This material is provided for information purposes only. It is not a recommendation or advice of any
investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any
commercial losses incurred by any party acting on information in these materials.
Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbH
M: +43 676 534 6852 / E: [email protected] / W: www.ceemeabusinessgroup.com