Consequences of the political crisis Results for 2004 Forecast for 2005–2006: Consequences of the political crisis Results for 2004 Forecast for 2005–2006 Press conference
International Centre for Policy Studies
20 December 2004
Plan of the presentation: Plan of the presentation About the International Centre for Policy Studies
Forecast for political developments in Ukraine
Preliminary economic results in Ukraine for 2004
Impact of the political crisis on economic development. Forecast for 2005–2006
What kind of regional policy is optimal for Ukraine? Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
About the International Centre for Policy Studies: About the International Centre for Policy Studies
Slide4: International Centre for Policy Studies Is an independent research organization, founded by the Open Society Institute in 1994
The Centre’s goal is to introduce public policy-making concepts and procedures in Ukraine
Works in tandem with various interest groups: government, business, NGOs, media
Web-site is at www.icps.kiev.ua Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
What makes ICPS forecasts better: What makes ICPS forecasts better The Centre has been preparing regular economic forecasts for Ukraine since September 1997
Quarterly updates of these forecasts make it possible to take into account new data and changing trends
Our analysts’ conclusions are not slanted
Since 2002, the forecast period has been extended to three years (now through 2006)
Since 2003, the Centre has been publishing a monthly analysis of government policy, political competition and external relations under the “Political Commentary” project Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Forecast for political developments in Ukraine: Forecast for political developments in Ukraine Daria HLUSHCHENKO
The democratic, middle-class revolution: The democratic, middle-class revolution The votes on 31 October and 21 November failed to clearly determine a new president
As predicted, the election campaign was the dirtiest the country had ever witnessed
Mass protests against vote-rigging were supported primarily by young people and Ukrainian SMEs Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Forecast for the outcome of the 2004 presidential election: Forecast for the outcome of the 2004 presidential election Viktor Yushchenko will win the 26 December vote
A repeat rigged vote in favor of Viktor Yanukovych is not very likely: the system for fixing the vote has been broken
Eastern and southern oblasts may not recognize Mr. Yushchenko as Head of the State Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Forecast for political reform: Forecast for political reform The president will continue to be the key political figure, provided that he effectively uses his powers, despite limitations imposed by Constitutional reform
The Verkhovna Rada will quickly form a new majority that will support President Yushchenko
The influence and effectiveness of political parties will grow Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Forecast for reforms: Forecast for reforms Democratic and market reforms should pick up considerably in mid-2005
Reforms to the tax, residential services and social security systems should remain on track
Corruption and government intervention in economic processes will be reduced, not the least because of the growing role of independent media Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Forecast for foreign policy: Forecast for foreign policy The president, the Verkhovna Rada and the Government will make efforts to develop relations with both the EU and Russia
Moscow’s determination to be the only full-fledged FSU negotiator with the EU, NATO and the US will be undermined
Ukraine could turn into the epicenter of western influence among CIS countries Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
The transformation of relations with Russia: The transformation of relations with Russia In the pursuit of mutual benefit, relations with Russia will become more pragmatic
Emotional positions such as “the friendship of brotherly peoples” will be dropped from the political vocabulary
Russia will be unable to manipulate Ukraine’s new president
The CEA as Russia sees it may never happen Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Prospects for European integration: Prospects for European integration Recent events in Ukraine have proved a watershed in the way that the country is perceived in Europe
A democratic presidential election and the events preceding it could bring the prospect of Ukraine’s accession to the EU closer
Relations with Brussels should become more active, while foreign policy will be clearly oriented towards accession Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Forecast for Ukraine-US relations: Forecast for Ukraine-US relations Ukraine will work to establish better relations with the US
Satisfying US demands regarding a democratic election should help resolve current problems in bilateral relations Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Preliminary economic results for Ukraine in 2004: Preliminary economic results for Ukraine in 2004 Andriy BLINOV
The risk to economic forecasts proved correct: The risk to economic forecasts proved correct The political crisis means that the economy will develop according to a risk scenario that the basic ICPS forecast did not predict
The Centre predicted that a president would be determined in the run-off and that the loser would acknowledge this victory
The Centre predicted smaller-scale vote-rigging
The Centre predicted lower volumes of social spending on the part of the Government Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Economic trends at year’s end: Economic trends at year’s end The political crisis did not turn into an economic one and the economy did not show any sudden deterioration
The economic impact of a radical political struggle, threats of separatism, and ineffective work on the part of government bodies will be no more than 0.5% of annual GDP:
a lending ceiling will be instituted
productivity will slip
foreign trade contracts will become more expensive and some will be broken
Budget revenues will shrink Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
External conditions and economic growth annual % change: External conditions and economic growth annual % change Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Real GDP quarterly change, %: Real GDP quarterly change, % Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Reasons for the economic slowdown: Reasons for the economic slowdown Economic growth will slow to 12% by the end of 2004 for three reasons:
Cyclic: five years of rapid economic growth under condition where there was insufficient investment and inflation accelerated to 12%
External: a stop in the brisk growth of prices on world commodity markets
Political: the short-sighted election policy of the Yanukovych Government, lower investment growth, huge capital flight Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Investment growth not excessive: Investment growth not excessive Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Ukrainian consumers lose confidence: Ukrainian consumers lose confidence Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Stable growth remains impossible: Stable growth remains impossible Insufficient development of domestic markets due to excessively porous economy (export/GDP ratio > 60%)
Concentration of metals exports (> 30%)
Obstacles to business development: “government-business” relations, dishonest competition, high political risk
Low volumes of foreign investment
Weak role of SMEs (10% of GDP)
Few opportunities for the financial sector to finance business or the general population, narrow range of services Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Impact of the political crisis on economic development. Forecast for 2005–2006: Impact of the political crisis on economic development. Forecast for 2005–2006 Andriy BLINOV
Forecast for 2005: Forecast for 2005 All government bodies will resume working and mass protests will stop
The priorities of the new Government will be stemming inflation, lowering the costs of foreign trade operations, stabilizing the banking sector, avoiding a payment default, and adopting a fiscally sound Budget
GDP growth will continue to slow, going down to 7%, due to trends that emerged in 2004 and low investment at year’s end
A moderate Budget deficit (2.5% of GDP)
In H1’05, inflation is likely to hit 15–16% year-on-year and settle at 11% by year-end Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Assumptions regarding economic policy: Assumptions regarding economic policy After the election, the quality of government policy should improve, while economic reforms will pick up
Investors will show stronger interest in Ukraine
The new Government will maintain social commitments made by the previous Government, but it will not be able to increase social support
Ukraine should accede to the WTO in late 2005 – early 2006 Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Risks to this forecast: Risks to this forecast The presidential election will be delayed and state administration paralyzed
The political crisis will turn into an economic one and a recession will emerge
High inflationary expectations will wreck the financial system and deepen the Budget crisis
Inflation will gallop ahead (self-sustained), causing a payment default and banking crisis
Growing risk of economic disintegration Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slowdown in economic growth GDP, real % change: Slowdown in economic growth GDP, real % change Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Investment will grow faster than GDP real annual % change : Investment will grow faster than GDP real annual % change Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Foreign investment will continue to grow annual FDI net influx, USD millions: Foreign investment will continue to grow annual FDI net influx, USD millions
Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slowdown in different economic sectors gross value-added, real % change: Slowdown in different economic sectors gross value-added, real % change Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slide32: An improving macro-financial situation A gradual reduction in the Budget deficit through:
revision of blanket privileges
stabilized expenditures (29% of GDP)
a gradual retreat from micro-managing
no emerging new debts due to availability of financial resources (privatization + international borrowings)
Slower inflation
Stable USD/UAH exchange rate and slower growth of EUR/UAH exchange rate Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
A shrinking Budget deficit Consolidated Budget revenues and expenditures, % GDP: A shrinking Budget deficit Consolidated Budget revenues and expenditures, % GDP Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
A stable nominal exchange rate UAH/forex: A stable nominal exchange rate UAH/forex Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Continuing acceleration of inflation in H1’05: Continuing acceleration of inflation in H1’05 Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
What kind of regional policy is optimal for Ukraine?: What kind of regional policy is optimal for Ukraine? Oksana REMIGA
Symptoms of regional policy problems: Symptoms of regional policy problems Interregional development gaps are growing over time
With the exception of the capital, no region is in the lead according to basic indicators Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Relative ratings of regions compared to national average: Relative ratings of regions compared to national average Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slide39: Budget contributions not proportional to regional economic development UAH per capita Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slide40: Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua High economic development not equal to high quality of life
Slide41: Cluster analysis of regional development An alternative to grouping regions by location
Reveals problems and development prospects specific to a group of regions
Confirms systemic problems in regional policy Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Groups of oblasts with common development features: Groups of oblasts with common development features The City of Kyiv
Dnipropetrovsk, Luhansk, Zaporizhzhia, and Donetsk
Kherson, Kharkiv and Mykolayiv
Crimea (including Sevastopol), L’viv, Odesa, and Zakarpattia
Sumy, Poltava and Ivano-Frankivsk
Volyn, Chernivtsi, Ternopil, Rivne, Khmelnytsk, Kyiv, Vinnytsia, Zhytomyr, Kirovohrad, Cherkasy, and Chernihiv Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slide43: Systemic problems with regional policy Lack of clear goals
Excessive centralization
Ill-defined role of national and regional governments
Ineffective means for supporting regions with development problems Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Slide44: Regional policy goals Overall national well-being
versus
Interregional equality Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Key regional policy tools: Key regional policy tools Special investment regimes—free economic zones
Inter-budgetary equalization mechanism
Sectoral programs allocating financial resources to support depressed areas
Centralized investment in socio-economic regional development
Support for socio-economic development in the mountain regions Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Principles of reform : Principles of reform Міжнародний центр перспективних досліджень
International Centre for Policy Studies Tel. (380-44) 236-4477
Web: www.icps.kiev.ua
Thank you for your attention!: Thank you for your attention!
Consequences of the political crisis Results for 2004 Forecast for 2005–2006: Consequences of the political crisis Results for 2004 Forecast for 2005–2006 Press conference International Centre for Policy Studies
20 December 2004