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30 December, 2010

An Old New Year

Without projecting and planning, any kind of economic activity becomes difficult at best, whether it’s a company or a household. The main thing is not to forget the relativity of any presumptions. The forecasts published in Ukrainian Week for GDP, inflation, employment, exchange rates, and real estate in the run-up to 2010 [№52, Dec. 25, 2009] proved accurate. Let’s try for the same with 2011
GDP, Industrial output
Summary for 2010
Forecast*: +3- 5%
Actual: +4.3%

Forecast for 2011
Government: UAH 1,253bn (+4.5% y-o-y)
YT: +4.5-5.0% with stable global financial system
Key factors: revived demand for Ukrainian commodities, growing domestic demand prior to Euro-2012

Dmytro Boyarchuk 
Executive director, CASE Ukraine
The official forecast for 2011 GDP growth, 4.5%, is fairly realistic, which is what the State Budget has been based on. Our forecast is for growth to be in the 4-5% range. Exports are already picking up, and even if they should drop a bit, transport, trade, construction and other industries could well drive demand for these commodities in the run-up to Euro-2012. We think this will keep the economy running in 2011, create new jobs, and increase tax receipts. The only serious problem is that, despite these favorable conditions, the investment climate is unlikely to improve. Still, capital will continue to flow to Ukraine from two traditional sources: Cyprus and Russia.

Oleksiy Blinov 
Director, Analytical Department, Astrum Investment Management
2011 will see GDP growth of as much as 6% in Ukraine. Moreover, the main trend will be livelier investment, in the public and in the private sectors alike. We expect investment in fixed assets to grow 20% this year. But most pro­jects will likely be financed through external borrowings. The foreign trade situation will remain good for Ukraine, especially for the steel industry and heavy machinery, as the world economy is slowly recovering from the crisis and growth is accelerating. 

Vasyl Yurchyshyn 
Director, Economic programs, Razumkov Center
The GDP forecast on which the Budget was based is more modest than the ambitious declarations of members of the Government about the results of “reforming” the economy. Growth of 4.5% is realistic, but there aren’t really many reasons for optimism. Firstly, growth in 2011 is unlikely to be greater than in 2010. Secondly even if the Government’s projections for 2011 come true, the country will not reach pre-crisis GDP levels, that is, this growth is starting from a very low baseline.

Summary for 2010
Forecast: +11%
Actual: +10.5% 

Forecast for 2011
Government: 8.9%
YT: 11-12% with stable global financial system
Key factors: growing residential services rates and food prices

Oleksandr Zholud 
Senior Economist, International Center for Policy Studies
In 2011, inflation will fall from 10.5% to around 9.9%, while the Consumer Price Index will stay below 110% for the first time since 2003—provided that the harvest is normal and world prices for agricultural goods don’t skyrocket as they did in 2010. Normally, Ukraine does not have two-three years in a row of heat waves. The anticipated rise in residential service rates will also push inflation, but this item represents less than 10% of the consumer basket. Among foodstuffs, sugar will grow the most in price because of the low sugar yield of beets in 2010, as will basic types of bread: despite price rises in 2010, its price remains below cost.

Vasyl Yurchyshyn 
Director, Economic programs, Razumkov Center
Official inflation figures have been underreported in recent years. For instance, in 2010, Derzhkomstat registered a mild rise in prices in August and September, although in fact, food prices grew very sharply during this period—some items as much as 150-200%. So the inflation indicator used by the Government for 2011 means nothing: 8.9% is only possible to reach in official reports. Meanwhile, the consumer basket is growing more and more costly because of the already-announced increases in utility rates, growing domestic prices for gas, public transport, and so on.

Dmytro Boyarchuk 
Executive director, CASE Ukraine
We expect the CPI to grow 10.6% December-on-December this year. Moreover agricultural inflation will be the most significant factor in the growing cost of the consumer basked for Ukrainians, in which foodstuffs represent more than half. We also expect residential service and public transit rates to climb, along with the cost of fuel, especially gasoline. Pessimism about the hryvnia among Ukrainian consumers will only stimulate inflation more.

Exchange Rate
Summary for 2010
Forecast: 7.5-8.5 UAH/USD
Actual: 7.9- 8.18 UAH/USD

Forecast for 2011
Government: 7.95 UAH/USD
YT: 7.95-8.00 UAH/USD with stable global financial system
Key factor: IMF line of credit

Mykola Ivchenko Director
The US dollar exchange rate used in the 2011 State Budget calculations is quite realistic and the fixed rate will remain quite stable. Until June 2011, the average sell price will be UAH 7.93 and will slowly decline to UAH 7.89 to the dollar. Key factors in keeping the national currency stable are cooperation with the IMF and growing demand for raw materials and unfinished products on export markets. 

Eric Naiman Partner
Capital Times
H1’11 will see a fairly stable hryvnia and even a slight strengthening, to UAH 7.80/USD, spurred by inflows of investment capital. Most of this will be due to privatization and debt investment, that is, long-term lending or purchasing debt. In H2, we expect the hryvnia to weaken again, to UAH 8.20/USD, caused by the traditional decline in the balance of trade as the amount of Russian natural gas consumed rises steeply. 

Eric Naiman Partner, 
Capital Times
H1’11 will see a fairly stable hryvnia and even a slight strengthening, to UAH 7.80/USD, spurred by inflows of investment capital. Most of this will be due to privatization and debt investment, that is, long-term lending or purchasing debt. In H2, we expect the hryvnia to weaken again, to UAH 8.20/USD, caused by the traditional decline in the balance of trade as the amount of Russian natural gas consumed rises steeply. 

Serhiy Yaremenko 
Former deputy Governor of the National Bank of Ukraine
My exchange predictions are the same as the official ones. The main factor that will affect the stability of the hryvnia will be whether IMF conditions are adhered to: the rate is to stay within a corridor UAH 7.90-8.00/USD, which is what it is doing so far. In return, the Fund will unload dollars in Ukraine so that the hryvnia doesn’t fluctuate. This means that other economic factors will play no role.

Summary for 2010
Forecast: 9.5%
Actual: 8.5%

Forecast for 2011
Government: 7.6- 8.1%
YT: 8% provided GDP grows 4.5-5%
Key factor: economic recovery

Ksenia Voronova 
Senior consultant, Brain Source International
Over 2008–2009, the number of employed individuals shrank by at least one million, but right now trends on the labor market are positive. Officially, employment rose from 57.7% to 58.4%, while the number of jobless shrank by 140,000 to 1.9 million. Our forecast is for this trend to continue through 2011. In 2010, many new jobs appeared for marketing, recruiting, sales and banking specialists [those groups that faced the most cuts at the start of the crisis. Ed.]. In 2011, new jobs will also open up in IT and at companies that specialize in producing basic consumer products, including processed food.

Iryna Bekeshkina 
Director of Research (DIF)
The labor market could be hard-hit if the government starts trying to force business out of the shadows, hunting down those who pay wages under the table. In 2010, the planned deficit for the Pension Fund was UAH 29.6bn and it could go even higher in 2011. If an employer pays monthly social contributions on UAH 20,000, it is unlikely that it will be pleasant to discover that payroll costs have suddenly rise to UAH 60,000. Faced with the threat of tax raids, many enterprises are simply cutting costs by letting some go and expecting the rest to work double duty. This will cause unemployment to rise and state spending on the jobless to go up with it. The benefit of increasing fiscal pressure is probably not worth the cost.

Real estate prices
Summary for 2010
Forecast: –10-15% (primary market)
Actual: -11% (primary market)

Forecast for 2011
Government: None
YT: –1-1.5% (primary market)
Key factors: small number of contracts, builder reluctance to reduce prices, weak mortgaging market

Oleksandr Rubanov President,
Union of Real Estate Professionals of Ukraine
The number of contracts in the property market will not rise in 2011 and could even go down. In short, the market will stagnate. Prices for residential space on the secondary market could come down 1.5-2% more over the year. On the primary market, the volume of unfinished construction projects is already around 90%, and what work is going on is very dilatory [as apartments are sold. Ed.] It’s going to take at least 4-5 years to reach 2002–2004 levels again.

Mykhailo Yermolenko,
General Director, Knight Frank LLC Ukraine
Market players had a lot of hope going into 2010 that the housing market would finally start recovering because of pent-up demand, but there were few changes. In 2011, prices for housing, which is mostly bought for use, not for re-sale, will remain as they are or contract 1–2% in the first six months. Many apartments on the secondary market have been for sale for a long time and have not moved, although owners have lowered prices as much as they are prepared to go.
 Viktor Vlasov President,
Vlast Group
In 2011, property prices are likely to inch up slowly. New properties will come onto the primary market, but not many, so there will be little downward pressure on prices. The market will recover as reasonable mortgages become available again. 

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