SStrategytrategy UUkrainekraine April 2012 Ukraine: A game worth playing? Strong recovery vs. external vulnerabilities Attractive valuations vs. macroeconomic risks Pegged currency vs. eroding competitiveness Untapped potential vs. weak institutions www.raiffeisenresearch.at © Vadym Dumanchuk Content Highlights 3 Focus on: UEFA EURO 2012 and the Ukraine 4 Politics 5 Real economy: GDP growth and fiscal policy 5 Monetary policy and inflation 7 Exchange rate, Balance of payments and external debt 8 Banking sector 10 Local currency government bonds 11 Sovereign Eurobonds 11 Corporate Eurobonds 12 Stock market (Top down) 13 Comparison tables and forecasts 14 Acknowledgements 15 Abbreviations CE Central European countries - Poland, Hungary, Economic abbreviations Stock Exchange Indices Czech Republic, Slovakia, Slovenia %-chg Percentage change BELEX15 Serbian stock index SEE South East European countries - Albania, Bosnia (not in percentage points) BET Romanian stock index and Herzegovina, Bulgaria, Croatia, Romania, avg average BUX Hungarian stock index Serbia CIS European CIS (Commonwealth of Independent bp basis points CROBEX10 Croatian stock index States) countries - Russia, Ukraine, Belarus BoP Balance of Payments PX Czech stock index CEE Central and Eastern Europe (CE + SEE + CIS) C/A Current Account MICEX Russian stock index CPI Consumer Price Index SASX-10 Bosnian stock index Currencies and Countries FDI Foreign Direct Investments WIG 20 Polish stock index ALL Albanian lek FX Foreign Exchange BAM Bosnian marka GDP Gross Domestic Product BGN Bulgarian lev LCY Local Currency BYR Belarusian roubel mmav month moving average Equity related CNY Chinese yuan mom month on month DY Dividend yield CZK Czech koruna pp percentage points EG Earnings growth EKK Estonian kroon PPI Producer Price Index LTG Long term (earnings) growth HUF Hungarian forint qoq quarter on quarter P/E Price earnings ratio HRK Croatian kuna T/B Trade Balance LTL Lithuanian litas ULC Unit Labour Costs LVL Latvian lats yoy year on year RS Recommendation suspended PLN Polish zloty UR Under Revision RON Romanian leu RSD Serbian dinar RUB Russian rouble SIT Slovenian tolar SKK Slovak koruna TRY Turkish lira UAH Ukrainian hryvnia 2 April 2012 Highlights Ukraine – A risky game worth playing? The Ukrainian economy remains on a strong recovery path. The country’s GDP Real GDP and inflation expanded at a rate of 5.2% yoy in 2011, propelled by a plentiful harvest, reviv- 30 25 Forecast ing domestic demand and favourable terms of trade. Inflation hit a nine-year low 20 15 in 2011, thanks to plunging food prices. Fiscal indicators have also improved no- 10 tably, with the general government deficit shrinking to 4.3% of GDP in 2011. The 5 0 public debt-to-GDP ratio dropped from 40% to 36%. Loan growth in the bank- -5 ing system returned in 2011, while the non-performing-loan ratio has finally sta- -10 -15 bilised at the very high level of 30-35%. -20 Despite these positive developments, the country is facing strong headwinds 2007 2008 2009 2010 2011 2013f 2012e given the troubles in the major advanced economies. The external position looks Real GDP (% yoy) extremely fragile, marked by a widening current account deficit, large external Consumer prices (avg, % yoy) Source: State Statistics Committee, Raiffeisen RESEARCH debt repayments and blocked access to global capital markets. With the less be- nign external environment and eroding domestic competitiveness, a deceleration Ukraine currency pegged to dollar of growth to 3-3.5% this year is in the cards. The challenging environment, pre- 8.15 12.00 election spending and the persistent loss-making of state-owned gas monopoly 8.10 11.50 limit the room for fiscal consolidation. Moreover, the country is still plagued by the same structural problems as back in 2008, with politics more occupied by 8.05 11.00 tactical manoeuvring than finding long-term solutions to these problems. 8.00 10.50 High macroeconomic risk dampens the performance of Ukrainian financial as- 7.95 10.00 sets. The local currency debt market remains shallow, with a high degree of dol- 7.90 9.50 larisation in the domestic economy, a dearth of long-term institutional investors 7.85 9.00 and a weak legal environment. The fragile external position and the IMF pro- May-10 Nov-10 May-11 Nov-11 gramme stalemate deter investors from taking Ukraine’s risk on the international USD/UAH EUR/UAH (r.h.s.) debt markets, despite attractive valuations. Finally, the performance of the local Source: Thomson Reuters stock market was disastrous in 2011, prompting an exodus of both institutional Ukraine sovereign ratings and private investors. S&P Moody's Fitch Foreign currency Ukraine definitely remains a risky game and the big question is whether it is Long-term B+ B2 B worth playing! No one disputes Ukraine’s bright long-term potential, but it is cur- Short-term B - - rently marred by the mounting economic vulnerabilities and tumultuous politics. Outlook neg neg stable Local currency We believe that without radical changes in the economic and institutional envi- Long-term B+ B2 B ronment, the country will be unable to exploit its long-term competitive advan- Short-term B - - tages. Instead, it may risk new cycles of high inflation and exchange rate depre- Outlook neg neg stable ciation, accompanied by subpar growth performance and deteriorating living Latest change Mar-12 Dec-11 Oct-11 Source: Bloomberg standards for many Ukrainians. Analysts Key economic figures and forecasts Raiffeisen Bank Aval 2007 2008 2009 2010 2011 2012e 2013f Dimitry Sologoub Nominal GDP (EUR bn) 104.6 122.6 81.7 103.0 118.4 140.1 150.8 [email protected] Real GDP (% yoy) 7.9 2.3 -14.8 4.2 5.2 3.5 4.0 Olga Nikolaieva Industrial output (% yoy) 10.2 -3.1 -21.9 11.2 7.6 5.0 4.0 [email protected] Unemployment rate (avg, %) 6.4 6.4 9.0 8.5 7.2 6.5 6.5 Sergii Shvets Nominal industrial wages (% yoy) 28.2 29.8 5.0 15.0 17.5 12.0 15.0 [email protected] Producer prices (avg, % yoy) 19.5 35.5 6.6 20.9 19.0 10.0 10.0 Consumer prices (avg, % yoy) 12.8 25.2 15.9 9.4 8.0 4.2 8.5 RBI Vienna Consumer prices (eop, % yoy) 16.6 22.3 12.3 9.1 4.6 9.2 9.0 Andreas Schwabe, CFA General budget balance (% of GDP) -1.1 -1.5 -8.7 -7.5 -4.3 -3.0 -2.0 [email protected] Public debt (% of GDP) 12.3 20.0 34.6 40.0 36.0 37.5 37.0 Gintaras Shlizhyus Current account balance (% of GDP) -3.7 -7.2 -1.6 -2.2 -5.5 -4.1 -4.1 [email protected] Official FX reserves (EUR bn) 21.7 22.2 17.8 24.8 23.7 20.6 21.4 Gleb Shpilevoy Gross foreign debt (% of GDP) 55.8 56.4 90.7 85.9 76.6 71.4 72.8 [email protected] EUR/UAH (avg) 6.9 7.7 11.2 10.5 10.9 10.9 11.6 Alexander Sklemin, CFA USD/UAH (avg) 5.0 5.3 8.0 7.9 8.0 8.2 8.9 [email protected] Source: Thomson Reuters, wiiw, Raiffeisen RESEARCH April 2012 3 Focus on UEFA EURO 2012 and the Ukraine Positive economic impact is estimated at 2.8% of GDP with the major effect stemming from general infrastructure spending Spending by foreign tourists should not have much of an effect on GDP or the balance of payments Hosting of the event entails significant outlays, mostly borne by the public sector Event organisation is not likely to generate a sizeable positive effect in the long run Distribution of expenditures In 2007, Ukraine and Poland won the joint bid to host the UEFA EURO 2012, UAH 4,2bn which will take place between 8 June and 1 July this year. An event of such UAH 6,6bn 4% UAH 12,5bn 6% 12% massive scale attracts enormous public and media interest, thus putting the host UAH 10,3bn country in the spotlight. On the other hand, organisation of the event requires 10% the presence of various necessary infrastructures: this goes beyond just stadi- UAH 32,5bn 31% ums and training facilities, and also encompasses a modern transportation net- UAH 21,0bn 20% work, security systems, communication services and accommodation facilities. UAH 18,3bn For Ukraine, it entails substantial preparation efforts. The country was lagging 17% Sport facilities Hotels far behind UEFA’s standard requirements, with the tumultuous economic develop- Airports Railway ments and persistent political quarrels of recent years deterring infrastructure in- Roads Urban transport Other vestments. Therefore, the hosting of the European football championship has pro- Source: State Programme on Preparation and Con- ducting of UEFA EURO 2012, Raiffeisen RESEARCH vided Ukraine with the opportunity to upgrade its poor infrastructure and attract a large amount of foreign tourists. According to our calculations, the total positive effect on the Ukrainian economy of hosting UEFA EURO 2012 amounts to 2.8% of GDP, spread over five years Value added impact (% of GDP) from 2008 to 2012. The major impact stems from general infrastructure spend- 1.2 ing, accounting for nearly 70% of the total effect, followed by the construction of stadiums and hotels. At the same time, the impact of spending by foreign tour- 1.0 ists on GDP is expected to be rather low and should not have much of an effect 0.8 on the balance of payments. The estimated impact on GDP for Ukraine is higher 0.6 than for other countries which have hosted major football events in recent years.