Business is pessimistic about prospects in the immediate future. Improvements are possible only this coming fall

Based on the results of April – June 2014, forecasts of the growth of business activities in Ukraine have deteriorated, according to data recently published by the State Statistics Service (SSS). Only every fifth Ukrainian industrial enterprise can expect improvement of the financial and economic situation in Q3 2014 compared to the second quarter of this year.

The main problem for many industrial enterprises is the shortage of working capital as a result of the recession and considerable devaluation of the hryvnia. Notably the most critical expectation in the industry is the preservation of jobs. Only 8% of companies plan to increase their staff, while 19% will have to downsize. Businesses also fear the decline in demand for their products, particularly abroad, and they complain that the shortage of working capital due to insufficient bank loans limits their investment opportunities.

Positive traders

Construction and development companies expect a continued rise in the cost of their work and an increase in wage arrears combined with the subsequent downsizing in the 3rd quarter of the year. In addition, there is also a possibility of further deterioration of the economic and financial well-being of companies and a decline in production capacity by 1.7 pp, which is on average 49.5%.

“Currently, the industry is facing political and economic risks that have accumulated over the past six months and is left on its own with the outcome – specifically, a decline in the number of consumers and frozen projects,” said President of the Confederation of Builders of Ukraine Lev Partskhaladze. He said the election of a legitimate president and the expected stabilization of the political situation in the country by this fall may improve business expectations in the construction industry.

Companies in the service business are also pessimistic. They do not forecast an increase in profitability, capital spending or the demand for financial services. “Companies and enterprises are so pessimistic due to the decline in people’s purchasing power. Export-oriented companies are in a somewhat better situation, although in certain sectors, such as IT, services, tourism and restaurant businesses contractors are delaying the implementation of planned projects due to the high political risks,” said Executive Director of the European Business Association Anna Derevyanko.

Summer splash

Agriculture, which was in a better situation than other sectors in the first two quarters of the year and practically the main donor of foreign currency revenues, does not have high hopes for the 3rd quarter. On the one hand, since April 23 in order to “stimulate economic relations with Ukraine” the EU unilaterally granted trade preferences to Ukrainian companies. But for now only a few of them have taken advantage of such an opportunity.

According to the Ukrainian Agrarian Confederation, over the last five months exports to the EU increased by 3.4%, which amounts to US $65 mn, compared with the same period in 2013, primarily due to the 43.4% increase in exports of animal husbandry products and a 2.4% increase in exports of planted products. Meat and by-products became leaders in the relative gain in exports by 88 times and grains became the leading commodity in absolute terms – + US $ 241mn.

At the same time, as a result of devaluation of the hryvnia only 10% of agricultural enterprises assess their financial and economic situation as positive, while 68% say their situation is satisfactory. Nevertheless, in Q3 2014 they expect a seasonal growth in output volumes and an increase the sales of their products. Moreover, while the sales rate on the domestic market will fall, the exports of agricultural products are expected to grow. Among the negative factors constraining farmers’ optimism are expensive fuel, the lack of working capital, high interest rates on loans and low demand for produce, according to the SSS report.

For this reason, only one fourth of farmers (26%) expect an improvement in the financial and economic situation over the next several months. Moreover, the main prerequisite for improvement in business expectations can be the signing of the Association Agreement with the EU scheduled for June 27. “Clearly, there will be no immediate results, but this is definitely a window of opportunity to enter European markets. We still have a lot of work to do: manufacture of products conforming to European standards, finding new customers and expanding the list of contractors,” says Derevyanko.

General Director of the Ukrainian Agribusiness Club Volodymyr Lapa believes there is a reverse side to the coin. “After signing the agreement on the free trade zone with the EU we will compete against European goods not only on foreign markets, but also on domestic markets. Even now Belarusian products are supplied to Ukraine in huge quantities and with the creation of the FTZ competition will become much stiffer. Cutbacks in state support combined with a simultaneous increase in competition will erode the competitiveness of Ukrainian products in certain areas of the agricultural sector,” says the expert. A positive disposition could be offset by changes in the taxation system for agricultural producers. In particular, this is about the proposed elimination of the VAT relief for agrarians proposed by the Finance Ministry of Ukraine.