Saturday, June 10, 2006

Business Confidence on the decline

Kyiv Post staff comments on constant delays in the formation of a governing coalition

Our concerns about the pending impact of delays in the formation of a parliamentary coalition government have been echoed in the analysts comments published in Kyiv Post. Overall I have found and consider Kyiv post to be a paper worth reading, their comments have been soundly based with minimal bias.  They seem to best understand Ukraine then the rhetoric that comes out of most western media that have no idea of what is really going on in Ukraine. We have decided to print in full this weeks comments.  past comments are also worth reading.   

by Roman Olearchyk, Kyiv Post Staff Writer
Jun 08 2006, 01:49

Ongoing bickering between Ukraine’s leading political camps and their failure to form a coalition government in a timely fashion has triggered a drop in consumer confidence, according to analysts, who also fear that investor confidence could decrease if a shaky coalition government with poor relations with Moscow is established.

According to a survey-based quarterly study conducted by GfK Ukraine (the Ukrainian affiliate of the international market research firm GfK-Group), and Kyiv-based International Center for Policy Studies (ICPS), the Consumer Confidence Index, a measure of the population’s confidence in the future, dropped by 6.6 points to 97.1 since February. The fact that the CCI value is below the 100-mark indicates that negative consumer confidence prevails in Ukrainian society, according to the study, which notes that “consumer confidence in Ukraine deteriorated due to the political uncertainty that has been prevailing in the country for more than half a year.”

“Apparently, the outcome of the [March 26 parliamentary] elections did not foster an increase in optimistic expectations in any of the regions across the country. Delays with the formation of a coalition and a new government reinforced the pessimistic economic expectations of Ukrainians,” the quarterly study concluded.

Since then, according to Yevhenia Akhtyrko, a senior economist at ICPS, confidence has not improved, as heated coalition talks between Ukraine’s leading political camps have stretched into their third month.

“I don’t think the situation has significantly changed since April,” she said.

Consumer confidence in Ukraine had crept back up into the positive range earlier this year, following a sharp decline last September, when political instability in the country was at a high for the year.

According to study organizers, the surge posted in February followed a slip in the consumer confidence that occurred last fall when the government of Yulia Tymoshenko was dismissed.

The study figure for December is only four points lower than the all-time high reported last spring, when Ukrainians felt optimistic in the wake of the Orange Revolution. The quarterly study is conducted using a poll of about 1,000 individuals aged 15-59, an age group that represents 61.3 percent of Ukraine’s population and the country’s most active consumers. The margin of error is 3.2 percent.

What Ukraine’s new government will look like and who succeeds in landing the prized prime minister post is, for some investors, more important than the delays in forming the country’s next government.

Tymoshenko, whose political bloc came out of the March 26 elections with a strong showing of support despite their falling out with Ukrainian President Viktor Yushchenko, is aiming to return to the country’s top government seat. Political allies of Yushchenko are allegedly attempting to block her return, fearing that she has become more popular than Yushchenko and is, as a result, well positioned to challenge him in the 2009 presidential elections.

In the near term, some investors trading in Ukrainian equity and debt also fear Tymoshenko’s return, citing her aggressive privatization review policy from last year and controversial price caps on fuel and other goods, which spooked investor confidence.

Tymoshenko has in recent weeks made efforts to calm investor fears, pledging to continue her campaign of fighting corruption in the economy while promising not to wage a massive privatization review policy and stick to liberal market reforms.

Besides Tymoshenko, other candidates have not publicly been discussed for the top government post of a renewed Orange coalition, yet insiders have said that coalition talks could stretch out into the summer, allowing current Prime Minister Yury Yekhanurov, a member of the pro-presidential Our Ukraine, to hold on to his post.

Tim Ash, an emerging markets analyst at the London office of Bear Stearns, is betting on the formation of a coalition between the Yushchenko-loyal Our Ukraine bloc and the Regions Party, led by Viktor Yanukovych, who lost the 2004 presidential elections to Yushchenko.

“I think there would be some nervousness over the return of an Orange coalition, given its previous disappointing performance,” Ash said. “My sense is that the general market view has been that Tymoshenko would ultimately fail in her quest to secure a return to office and that the next government would be a Regions of Ukraine-Our Ukraine coalition.”

One of the big fears, according to Ash, is whether the fiery Tymoshenko “can hold together a new Orange coalition, given the experience of in-fighting last time around.”

Ash sees Our Ukraine and Regions as center-right political forces backed by big business interests; Tymoshenko’s Byut bloc and the Socialist party, the other member of the planned Orange coalition, are more center-left political forces. A partnership between Our Ukraine and Regions would be more natural, according to Ash.

Should Tymoshenko return as premier, her challenge would be to normalize relations with Russia, which has threatened to raise natural gas prices for Ukraine further, after doubling them through a January accord. The return of Tymoshenko, who has criticized last January’s gas accord and threatened to oust the role of controversial gas-trading intermediaries, such as Swiss-based RosUkrEnergo, a company that earns billions dealing in gas between Ukraine, Russia and Central Asian countries, could cause relations with Moscow to intensify.

“They key for the market will be the relationship with Moscow, and I think there would be a desire for Tymoshenko to quickly work to normalize that relationship. If she doesn’t, then we may have a return to 2005, in effect, a running trade war with Russia, which would be damaging to the Ukrainian economy. In any effect, there is obviously a big question mark over the gas-pricing agreement with Moscow and the future of RosUkrEnergo in Ukraine, given Tymoshenko’s commentary on the issue,” Ash added.

Jorge Zukoski, president of the American Chamber of Commerce in Ukraine, a business advocacy group in Kyiv, said that the investment community is seeking a clear agenda of reforms and predictability from the next government.

“At the end of the day, both foreign and domestic investors are looking for predictability and stability in the market in which they commit resources,” Zukoski said.

“Moving the bar, backtracking on reforms and public political scuffles will only further confuse and frustrate investors at a critical time on Ukraine’s path toward integration with the larger global community,” he added.