1. Ukraine’s economy: outlook for 2003–2004 International Centre for Policy Studies Senior Economist Andrew Blinov Presentation for economic counsellors 10 December 2002

2. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Presentation plan 1.About the International Centre for Policy Studies 2.ICPS GDP forecast for 2003–2004 3.ICPS forecast assumptions for 2003–2004 4.Impact on different sectors of the economy 5.Impact on financial stability 6.Risks to the ICPS forecast

3. About the International Centre for Policy Studies

4. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua What is ICPS? The International Centre for Policy Studies is an independent research organisation, founded by the Open Society Institute in 1994 Our mission is to promote public policy concepts and implement procedures for public policy formulation in Ukraine We provide the following services: –public policy research –training for participants in the policymaking process –facilitating public dialogue

5. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua ICPS suggests: 1.“Economic Research” publications package 2.Custom research and other services for business 3.New products on offer: Research on Ukraine’s middle class Regional trends Information on other ICPS services is available on our website www.icps.kiev.ua

6. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Quarterly Predictions (a review and forecast of the development of the Ukrainian economy, published quarterly since 1997) Consumer Confidence (quarterly survey of the economic expectations of Ukrainian households) Economic Statistics (monthly table of statistical data important in doing business in Ukraine) New Economic Legislation (annual analysis of the effect of legislative changes on doing business in Ukraine) Policy Studies (research papers on the most important issues of national policy) The “Economic Research” package includes:

7. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Annual subscription conditions for the “Economic Research” publications package from ICPS: if subscription is taken by 31 December 2002, clients qualify for the special discount price of 1,995 hryvnias + the first issue of Regional Trends publication for free after 1 January 2003 the subscription price will be 2,495 hryvnias Long-term subscriptions qualify for substantial discounts: for three years, pay 5,195 hryvnias (save 30%) for two years, pay 3,995 hryvnias (save 20%) Subscription applications are available and may be submitted via the ICPS website www.icps.kiev.ua “Economic Research” package terms:

8. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua What is Quarterly Predictions? Analysis of development trends in the Ukrainian economy Overview of quarterly events and their evaluation Quarterly updates of the forecast for economic developments in Ukraine

9. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua What do we endeavour to deliver to our readers? Understanding of development patterns of the Ukrainian economy at the macro level Vision of the future dynamic of economic processes in Ukraine Impact evaluation of governmental decisions on the dynamic of Ukraine’s economy Evaluation of changes in the country’s economic activities — GDP forecast

10. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua ICPS forecast strengths ICPS has been regularly generating an economic development forecast since September 1997 Quarterly forecast updates allow to keep track of new information and trend changes Analysis of all available information Independence

11. ICPS GDP forecast for 2003–2004

12. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua ICPS dampens its vision of economic development for 2002–2004 In 2002, Ukraine’s GDP will improve by 4.3% 2003 will see growth decelerating to 3.5%… … while in 2004 it will bounce back to 4%

13. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Real GDP index, seasonally adjusted, Q1’95=100

14. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Comparison of the previous forecast and its updated present version GDP growth rate, % Previous forecast Present forecast 20024.54.3 20035.03.5 20045.54.0

15. ICPS forecast assumptions for 2003–2004

16. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua ICPS downgraded its forecast following a review of assumptions Worsened assumptions about public policy developments: –short-term interests will prevail over any long-term vision of public policy –government decisions will be impossible to approve Forced redistribution of property in the course of political struggles Downgraded forecast for GDP of Ukraine’s trading partners

17. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Reasons for a less optimistic view of Ukrainian government policy Efforts of individuals involved in approving decisions are squandered in political struggles, instead of devoting them to national policy development Divergence of opinions regarding political issues dominate over any agreement of opinions regarding economic policy Business representatives are directly involved in the political struggle and cannot influence this choice The old command-administrative methods of decision making do not work under conditions of political competition Public trust in the government is dwindling

18. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Impact on the dynamic of the Ukrainian economy Capital losses: Higher risks to domestic investments Capital outflow from Ukraine and insignificant volumes of foreign direct investments coming in Increased costs of private and public external loans Consumer pessimism: Worsened social expectations and consumer confidence Decreased household incomes and decelerated consumption

19. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Forced redistribution of property hinders investment Political interests and big business are juxtaposed Immaturity of the stock market and lack of relevant legislation hamper a civilised transfer of property Forced redistribution of property leaves no opportunity for investors to recoup invested money

20. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua GDP, consumption and investment annual % change

21. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Consumer confidence index

22. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua GDP of Ukraine’s trading partners and export growth annual % change

23. Impact on different sectors of the economy

24. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Downgraded forecast will have a varying impact on different sectors The highest risks come from sectors where public property dominates and where hefty cash flows are concentrated: –electricity, gas, and water production and supply –pipeline and railway transport –communications Sectors producing investment goods and services, specifically, machine-building and construction, will incur losses Highly competitive sectors, like trade and automobile transport, will be less affected

25. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Competition % of respondents

26. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Possibilities of mitigating investment risks Trouble-free market entry and exit reduce investment risks Highly competitive markets and those with a measurable share of private enterprises are more attractive

27. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Ownership % of total number of enterprises

28. Forecast across sectors real % change Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua

29. Impact on financial stability

30. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Exchange rate UAH/USD

31. In 2002, the nominal UAH/USD exchange rate has not undergone any noticeable changes, due to the following: –a higher than forecasted positive balance of foreign trade –a high rate of transfer receipts The worsened balance of payments will cause a slow nominal depreciation: by the end of 2003, the exchange rate will attain 5.55 UAH/USD, while in 2004 it will reach 5.69 UAH/USD Real effective exchange rate will be kept at a stable level Depreciation will resume Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua

32. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Current account balance and trade balance of goods and services millions USD

33. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Trade balance will shrink at a slow pace In 2003–2004, the foreign trade balance will be shrinking, although slower than we had forecasted earlier: goods exports will grow at a slower pace, due to the more sluggish GDP growth of Ukraine’s trading partners goods imports will climb up less briskly, in view of decreased consumption and investment; the growth will be more vigorous than for exports services imports will enlarge in the wake of capital outflows

34. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Gross reserves accumulation and payments on the state debt millions USD

35. Remonetisation will persist: in 2003–2004, money mass indicators will advance to 30% Money market and lending activities Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua

36. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Growth of monetary aggregates % y-o-y

37. Remonetisation will persist: in 2003–2004, money mass indicators will advance to 30% Money market and lending activities Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Excessive liquidity is forcing banks to cut interest rates on loans, with deposit interest rates being simultaneously reduced

38. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Alternative money value % per annum

39. Remonetisation will persist: in 2003–2004, money mass indicators will advance to 30% Excessive liquidity is forcing banks to cut interest rates on loans, with deposit interest rates being simultaneously reduced Money market and lending activities Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Lending volumes will increase more sluggishly, because of diminished investments and capital outflows

40. We forecast that consumer prices will pick up in 2003–2004, by 6% and 5.5%, respectively Price growth factors: –moderate increases in tariffs for electricity and public utilities –pressure from growing producer prices Deflation will cease Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua

41. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua Price index dynamics % annual change

42. Risks to the ICPS forecast

43. The situation will be markedly worse than our forecast in the event of: Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua RisksPossible implications 1.A rapid shift of the economy into the “shadow” 2.Financing of the budget deficit at the expense of NBU loans (e.g., via bonds) 3.Sanctions imposed by the FATF, UN, and the USA 1.An abrupt slump of budget revenues 2.Frozen contacts with international financial organisations, high inflation 3.Impossibility of external loans, blocking of foreign economic settlements 4.A steep price increase for oil and other resources; decelerated dynamic of Ukraine’s economy 4.Abrupt deterioration of the world economy in the wake of global political instability and frequent terrorist incidents

44. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua How can economic development be promoted? Political forces should separate their political struggles and public policy discussions Political parties should declare their vision of public policy and compete to improve the quality of public policy Government analysts who are not involved in the political struggle should prepare justifications of decision options and impact assessments Comprehension of implications will make politicians responsible for opting for certain decision options

45. Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. +380 44 236-4477 Web: www.icps.kiev.ua New government formed In November 2002, the idea of forming the Cabinet of Ministers on the parliamentary majority basis has been realized Yanukovych’s Cabinet has to bring itself to shift from its policy of hasty decisions to strategic long-term judgments In order not to become a one-day government, the Cabinet of Ministers should: –make sure each decision maps into government strategy –introduce middle-term budget planning –determine priorities provided with sufficient financing –make government activities transparent in order to gain people’s and business confidence –sketch in the extent of state support to business

46. Thank you for your attention!