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The base effect that boosted growth rates earlier in 2010 is winding down, while the current account deficit is reemerging.
Growth in 2011 is forecast to remain around 4 percent but needed structural reforms would provide significant upside over the medium term.
Reforms have made some progress in the past six months, with pension reform remaining the most critical immediate challenge.
Recent Economic Developments
Ukraine’s economic recovery slowed in the third quarter of 2010. Real GDP grew by 3.5 percent 2010Q3 y/y, after 5.9 percent growth in Q2. A smaller grain harvest and subdued external demand contributed to the deceleration of GDP dynamics. But industrial production continues to expand at double-digits (10.7 percent y/y growth over 10 months) and domestic demand has started to pick-up driven by real income growth.
The current account deficit reemerged whilst consumer price inflation returned to single-digits. Since mid-year, the current account has deteriorated, leading to a USD 1.8 billion deficit in the first 10 months of 2010. The key factors behind this are the recovery of domestic demand for imports and the introduction of export quotas on grain. At the same time, external private debt roll-over rates improved to 102 percent in 2010 to date, supporting net inflows on the capital account. Following a food-price driven pick-up in September, consumer price inflation decelerated to 9.2 percent y/y in November.
The new tax code contains a number of positive elements, but some key problems in tax policy and administration remain. Among the achievements are the streamlining of local taxes, reforms to the profit tax for insurance companies, and the consolidation of separate pieces of tax legislation into a single code. However, new tax exemptions and privileges reduce the tax base of the Enterprise Profit Tax (EPT) and the Value Added Tax (VAT), thus making the desirable reduction of direct tax rates fiscally more challenging. The tax code also missed the opportunity to deal with existing VAT tax exemptions and special regimes that have proven ineffective at stimulating economic activity or reducing prices on specific products in the past. Moreover, the new VAT scheme for grain and wood products acts as a tax on exports and may thus hamper growth in these sectors. The reform of the Single Tax System in a way that accommodates truly small businesses in all activities whilst reducing tax evasion and improving equity in the system has been postponed. And the tax code does little to reduce the complexity and burden of tax administration.
Medium Term Outlook
Current economic dynamics warrant an upgrade in our GDP growth forecast for 2010 to 4.3 percent, but we keep our earlier estimate of 4 percent growth for 2011. We expect growth to remain between 4-5 percent over the medium-term. This forecast assumes that the banking sector would gradually resume financing to support the private sector, while export growth rates decelerate due to the statistical base effect and subdued external demand. There is a significant upside to the export and growth forecasts should export barriers (such as grain export quotas) be removed and VAT refund claims be paid on time, and should structural reforms to make the tradable sector more competitive be accelerated over the next 23 years. Public consumption will remain subdued as fiscal consolidation is assumed to proceed to ensure longer-term sustainability of public finances. We expect consumer inflation to stay around 10 percent in 2011 as energy and utilities tariffs are raised further. Gradual disinflation will resume thereafter as the NBU increasingly puts inflation at the core of its objectives. The current account deficit is projected to gradually expand, but remain fully financed by private capital inflows, as long as adequate macroeconomic policies are maintained and the IMF program remains on track.
A key step forward in structural reforms has been the enactment of the new Public Procurement Law. The new legal framework, adopted in July, 2010 significantly improves governance and efficiency in public procurement. The tasks ahead are to implement and make the law fully functional without taking any steps in detriment to its core principles and provisions. Parallel legislation will also be needed to regulate specific economic activities such as of natural monopolies, in line with international practice, and to make the Anti Monopoly Committee fully functional as a complaints/review body. Additionally, a monitoring framework to evaluate the performance of the system should be established.
Pension reform is critical to safeguard fiscal sustainability and the benefits of current and future pensioners. Demographic pressures are increasing: in 10 years there will be 1 pensioner for every contributor to the system and this ratio will worsen sharply thereafter. Pension spending is already at a record 18 percent of GDP and high contribution rates encourage underreporting of income. Yet the value of pensions received by a large proportion of pensioners has been eroded by inflation. Planned increases in the retirement age for women and an extended contribution period are key measures that will help to restore balance to the pension system and thus secure adequate levels of pension payments over the medium term.
Purposes of company: Investments Company description:
Market Overview: Construction volume is increasing 20-25% annually, creating an increased demand for high quality façade bricks. The industrial capacity of façade bricks is estimated at 200 million bricks per year. In 2006, a construction boom is expected in southern Ukraine, where the plant is located. The product is used mainly by construction companies and private companies.
Using KSE-400 (Germany)
Equipment supplier offers trainings for the buyer’s staff
Can produce 30 million bricks per year including high quality hollow façade bricks, ordinary bricks, molded bricks, white and colored bricks
Production of lime-sand bricks is considerably more energy efficient than the production of ceramic bricks. Moreover, the project envisions the reconstruction of one of the two pit-type 50-ton lime-burning kilns; using coal, automatic blending, loading, and burning will save on gas
Plant produces its own lime; a sand-pit is located close to the plant
No high quality lime-sand hollow bricks are produced in southern Ukraine
Due to the considerable decrease in the weight of the bricks, delivery and transportation becomes much easier; bricks can be transported by auto, railway (via the plant’s rail track), or by water (a river port is 8 km away) Investment Project Progress: Market research has been conducted
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