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Morgan Willams: Ukraine and the financial crisis


Morgan Williams is director, government affairs, Washington office of the SigmaBleyzer Emerging Markets Private Equity Group,, and serves as president/ceo of the U.S.-Ukraine Business Council. He has been active in the economic and business development of Ukraine since 1993. In 2007 he received a Presidential Award from President Viktor Yushchenko for his service to Ukraine.


The world financial crisis rolled over Ukraine last fall just as it did over many other countries around the world. Ukraine was especially hard hit by the crisis. Ukraines economy and people were thrown into an economic whirlwind and the financial numbers went down rapidly and dramatically.

The worlds financial press have written articles about Ukraine which make it appear that Ukraines government could default on its obligations. The articles in the financial capitals of the world make Ukraine look like an economic basket case.

Yes, there are serious problems in Ukraine but many of the articles are over-the-top and exaggerate the real situation found in Ukraine. The articles make it appear Ukraine has little ability to make an economic comeback anytime soon and question its ability to move forward to new economic prosperity.

Almost all leading economists who monitor the situation agree that Ukraines prospects of defaulting on its obligations is almost zero. Based on the information today, several months into the crisis, they really believe there is no chance of default. They also have agreed that many of the articles that have appeard in London and New York about Ukraine paint the financial and economic picture much bleaker than it really is and thus do not tell the story of what is going on in Ukraine accurately.

Max Alier, the International Monetary Fund (IMF) Resident Director in Ukraine, said in London in late April, that he attributed an almost zero chance of sovereign default this year by Ukraine.


Ukraine  dealing with the financial crisis

Dr. Edilberto Segura, Partner and Chief Economist for the SigmaBleyzer Emerging Markets Private Equity Investment Group/The Bleyzer Foundation in Kyiv, recently made two presentations entitled, Ukraine  Dealing with the Financial Crisis to a large number of members and guests of the U.S.-Ukraine Business Council (USUBC). One USUBC meeting was held in Kyiv and one in Washington, D.C. Michael Bleyzer, Founder and President of SigmaBleyzer, also spoke at the USUBC meeting in Kyiv.

Dr. Segura headed the World Bank program in Ukraine in the mid-1990s. SigmaBleyzer is one of the leading private equity investment firms working in Ukraine and has about one billion dollars in investments under their management.

Dr. Segura stated in his presentations, Ukraine today is perceived as a country facing possible default. But it is not likely to default on its sovereign obligations (external public debt was only 11% of GDP at end-2008. From 20032007, Ukraine was one of the fastest growing economies in the region. The growth was supported by booming domestic demand for Ukrainian goods and services and by strong exports.

According to Dr. Segura Ukraines macroeconomic performance from January to September 2008, continued to enjoy good results: real GDP grew by 6.3 yoy, inflation was going down, the fiscal budget was in surplus and public debt was declining, exports of goods grew by 50% yoy, the current account had a deficit but it was met by capital inflows, international reserves reached $37 billion.

But, Dr Segura pointed out, Since October 2008, the global crisis hit Ukraine more than other emerging markets: real GDP declined by 8% yoy in the last quarter of 2008, exports dropped by 1% in the last quarter of 2008, but fell by 16% yoy in Nov-Dec 2008 yoy.

In January February 2009, the contraction continued with industry declining by 32.8% yoy and construction by 57% and exports fell more drastically by 38% yoy in January February 2009. Ukraines exports contracted significantly due to reduction in commodity prices and the significant economic slowdown in the rest of the world.


Causes of the crisis in Ukraine

Ukraine was more vulnerable to the crisis than other emerging markets, Dr. Segura believes, due to a combination of large current account deficits, large external debt burden and banking sector weaknesses. In 2008, exports grew fast at 33% pa, but imports grew even faster at 39% pa. As a result the current account deficit reached around $13 billion in 2008, or 7.2% of GDP.

In the last two years total external debt doubled from $53 billion to $103 billion by the end of 2008, a lot of which was short-term private debt (about $36 billion). During 20062008, bank credit grew from 70% pa, supported by increases in money supply and borrowing from abroad. As in many other countries, these high rates of credit growth led to high levels of non-performing assets.


So what is Ukraine to do?,

five pillars of crisis resolution

Dr. Segura discussed his belief, based on his extensive international experience with USUBC memberships, that to resolve successfully the financial crisis the following five pillars should be implemented in Ukraine.

Establish strong organizational arrangement to confront the crisis

Secure substantial foreign financial assistance (especially the IMF)

Implement a comprehensive program for troubled banks and their borrowers

Implement a macroeconomic stabilization program

Implement structural reforms to revive economic and export growth.


Prospects for the future

Dr. Segura pointed out to the members of Ukraines business community that the successful implementation of the measures stated before, particularly the IMF program, would address Ukraines vulnerabilities as follows:

l Current Account Deficits. The current account deficit would be contained by the control of aggregate demand through tight fiscal policies (fiscal deficit consistent with non-monetary financing) and tight monetary policies (control of money supply and credit) as well as by the current devaluation. Thus, the current account deficit should be about $3 billion, a manageable amount.

l High short-term foreign debt service in 2009. The repayment of this short-term foreign debt would be feasible with the IMF disbursement of $10 billion and likely financing available from other international institutions. Thus, this vulnerability could also be under control.

l Weak Banks. The banking sector problems are being handled relatively well. If the current recapitalization plans are successful, systemic issues may be under control, though a number of medium and small banks may fail.

Under this scenario, the crisis would be contained during 2009. The exchange rate would stabilize and GDP recovery could take place in 2010, following the recovery of the world economy.


How is Ukraine doing?

In an article for The Moscow Times published in late April 2009, Dr. Anders Aslund, Senior Fellow at the Peterson Institute for International Economics, Washington, D.C., a Senior Advisor to USUBC and a long-time observer of Ukraines economy, wrote: A month ago, I wrote a column about Russias return to sane economic policy, but Ukraine has undertaken an even more impressive turnaround. Few countries have been more misunderstood than Ukraine, which has been particularly hurt by the global financial crisis.

Fortunately, the Ukrainian government acknowledged the crisis in early October and asked for help from the International Monetary Fund. Within four weeks, Ukraine concluded a deal with the IMF  a large, strong two-year standby agreement with $16.4 billion of credits.

The IMF program was standard with three key demands: a nearly balanced budget, a floating exchange rate and bank restructuring. Ukraine has delivered. After some hesitation, the countrys Central Bank let the exchange rate float. Although it depreciated by about 50 percent, it has since stabilized, giving Ukraine a new cost competitiveness.

Together with the international financial institutions, the Central Bank has examined all of Ukraines banks and quantified their bad debt. Compared to the West, Ukraines share of toxic debt is small.

The Ukrainian parliament agreed to increase excise taxes on alcohol, tobacco and diesel, and the prime minister decreed further revenue measures to reduce the budget deficit by 2 percent of GDP. With substantial financing from various international financial institutions, the IMF mission considered that the shortfall was almost covered and recommended a second enlarged tranche.

Thanks to early and resolute anti-crisis actions, international reserves remain reassuring at $25 billion, or eight months of imports. Industrial production increased in both February and March over the preceding month, suggesting that Ukraine might already have turned the corner (although GDP will probably still decrease by 8 percent to 10 percent this year). Even the bond and stock markets have soared in the last month.

Ukraine has shown exemplary crisis management thanks to a few Ukrainian top officials  notably Prime Minister Yulia Tymoshenko, Dr. Anders Aslund concluded.

Over 100 members of the U.S.-Ukraine Business Council (USUBC) strongly believe Ukraine will survive the financial crisis, will not default and will move forward to new economic prosperity. They are not leaving Ukraine but making plans to increase their operations in the future. Ukraine with its 47 million people is a too large and promising market. Companies do not want to be left out of this largest emerging market in Ukraine.


By Morgan Williams



Dr. Edilberto Segura, Iryna Teluk, Membership

Director, USUBC and Will Pomeranz, Deputy

Director, Kennan Institute at the meeting

in Washington on April 7 2009.


Dr. Edilberto Segura at the meeting

in Kyiv on March 25 2009.



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