Keynote points of the discussion and abridged expositions of speaker reports are published below.
Keynote Points:
GDP drop is currently estimated at -35%, and the exports have critically plunged from 13 million tons at the beginning of the invasion to the current 2 million tons.
According to UN statistics, some 6.8 million have currently left Ukraine while 2.2 million returned to the country and 4.6 million (10% population) emigrated. The consumption potential has shrunk by 12–15% minimum.
The National Bank is introducing limitations on the inter-bank market. The retail lending market is less regulated. The exchange rate is fixed and the overall economic policy is aimed at preserving macroeconomic stability and preventing the Fx rate from going up to UAH40/$.
The structure of the balance of payments has changed: trade loans are indicative of -USD4.5 billion, more than two months-worth of all commodity exports.
Security risks have caused capital flight. Ukrainian businesspersons try geographic diversification of their business abroad. Business rebounding is of topmost priority today.
International partners are ready to provide more than 30 billion US Dollars for extra military expenditures, humanitarian aid, salaries and retirement benefits.
It is important to set up investment pools ready to invest in Ukraine without high profit margin yet with an option of new or released niches.
The country has a unique opportunity of, rather than restoring everything old, modernising or transforming the economy to make it more efficient and productive.
Transcript of discussion (for the full video of discussion please follow the link)
– The government has roughly estimated the invasion aftermath at 30–50% GDP slump. Is it possible to have a more precise assessment of the situation today?
Olena Bilan
It is hard to make estimates without access to confidential data. The State Statistics Office is currently withholding all the statistical data but for price and foreign trade stats. Other ministries and institutions are not publishing sectoral information as they have been doing before. Because of that, we rely more on our own observations of what is happening to restaurants and shopping malls as well as on business surveys. All of these indicators are currently demonstrating the economy has not been quite able to overcome the initial shock.
According to National Bank estimates, early in the war the economy had shrunk 50%, that is, we lost a half of our production capacities. However, it was replaced with a restoration later on. The slump of the GDP slowed down from -45% in March, -40% in April and a possibility of -35% in May.
The core question now is what will happen next? Will we be able to grow and rebound even if hostilities and threats of air attacks continue? The Ukrainian economy has a rather substantial safety margin so the recovery will continue.
Exporting capacities are of critical importance for Ukraine. Before the war they exported up to 13 million tons a month, now about 2 million tons. We might be able to expand the capacities to 5–6–7 million tons but it will still make a half of the pre-war volume. This substantially affects the economy and prospects of manufacturing restoration.
Another important question about the future is: will those who left the country ever come back? They make for a substantial share in consumption. The rather pessimistic scenario is -50% by the year end. It may become the real-life one if the invaders have progress occupying territories. The case of cessation of hostilities might bring a recess of -30%, possibly, even less than that. With ports open, we may think of a slump of around 22–25%.
– What is the situation with the leavers? The UN is saying some 6 million Ukrainians left the country. What about consumption expenditures due to the displacement?
Oleksandr Parashchiy
Labour losses or, to be exact, the losses of individuals who left is among the key factors to determine the economic policy in the future. According to UN statistics, some 6.8 million have left and 2.2 million returned since 24 February to this day. That is, 4.6 million, or more than 10% population, left for good. This means an automatic reduction of our consumption potential by at least 12%.
About 40% those who left were children. At least 27% children up to 18 y. o. and 30% school-age children abandoned the country. This means our infrastructure may drastically change if they don’t come back. 30% schoolchildren is a huge number; we can lose the whole generation and receive a new underused education system. It will be interesting to see how the university enrolment campaign will go; after it, we will be able to make certain conclusions as to whether the young are willing to stay in Ukraine. The situation with emigration is rather alarming to date.
A 20–25% economy downturn may be a real number if the war ends right today. There has been a 15% decrease in consumption potential. One also has to take into account a drastic reduction in the purchasing power of the population, not speaking of a decrease of personal income. As regards manufacturing: given the destroyed Mariupol and some other towns in the east, this will be 15–20% depending on whether the hostilities in the north, in Donetsk Oblast and towns in Luhansk Oblast can be stopped now. Therefore, even if the war ends today, we will be able to restore maximum 80% of what we had before 24 February. In the best case scenario, we will be looking at -30% economic activity reduction in the last months of the year with the probable annual average closer to -35–40%.
– Lot of attention is being paid now to the exchange rate and the widely debated National Bank’s decision. Could you share your ideas of potential trends on the Fx market? What is happening there and where will it go?
Olena Bilan
Most of the currency market is rather rigidly regulated now. Given strict limitation on overseas payments it is not exactly a market now. There surely are exemptions and the items in the critical import list now cover 90% pre-war imports. The individuals staying abroad can freely use their bank cards too. These are two substantial exemptions from the overall situation with overseas transfers that are rather hard and sometimes, even impossible to make. So, this is about a strict manual regulation of the market.
There are two segments on the currency market today: the traditional inter-bank market for all the importers and exporters and the retail market that is much less regulated now. The last National Bank’s actions have reduced regulation of the second segment so the Fx rate we see in exchange kiosks is much higher than the NBU’s official rate. In conditions of substantial limitations this is a natural situation that cannot be avoided.
What will happen further on? My understanding and forecast is as follows: the National Bank will try going back to the pre-war regime but this will be only possible in a rather phased manner. The regime will mean the exchange rate will fluctuate rather than remain fixed like it is now. The task of the NBU will be to gradually avoid any brisk devaluation changes. It is hard to tell when this might happen – possibly, close to the year end, maybe, sooner. With a view of a rather substantial price hikes, the economy needs not additional Fx fluctuations on the currency market as they are risk-prone and may bring about a lot of extra negatives. Therefore, they will try to avoid the situation but, on the other hand, living in such a manual regime is also a challenge with hidden negatives of its own.
Oleksandr Parashchiy
Yes, any brisk fluctuations will not be well received now. The economy already has had enough stress so, if an Fx one is added, this might further spur the panic. On the other hand, we see the keeping of the inter-bank exchange rate costs dearly to the National Bank; we see the lot of currency used to maintain the rate, and the reserves are not limitless.
We hope for a gradual change of National Bank’s policy and for an exchange rate that will be more or less close to the real one. Seeing how the economy and the foreign trade of Ukraine have radically changed since 24 February, it would be a real challenge to guess what a balanced rate might be. E.g., there were two biggest export commodities last year that accounted for nearly a third of export revenues. Those were foodstuffs – grains – and mining and metal industry produce (steel and ores). In spite of a deep downturn, foodstuffs have retained their lead positions. The second place is now for IT exports, the single category that has not slumped and currently accounts for about a sixth of all commodity and service exports. That is, our economy has a completely different international image now.
If we check our imports, we will see that, despite large-scale limitations on critical import items inside the country, we do have a substantial item that accounted in April for 35% total commodity and service imports, the expenditures of our Ukrainian refugees abroad. They are greater than the total foodstuffs and steel exports in April.
The structure has changed a lot. Obviously, a new structure should have a new balanced exchange rate. However, we are talking here only about the balance of trade as well as about other items that have always looked strangely in the balance of payments always coming into light at times of great uncertainty. For example, trade loans that pushed the balance of payments in red for almost USD4.5 billion in March and April exceeded two months-worth of total commodity exports.
In spite of all the limitations implemented by the NBU on the physical import market, we still have huge gaps in the balance of payments and it is not yet clear how the National Bank is going to treat these. Hence, it is not yet possible to talk with any precision about a balanced exchange rate, about it remaining at 29.25. A new currency exchange rate will be levelling in the coming five to six months, and it will be surely a growing trajectory.
– The salaries are going down; many individuals who had planned to leave before are now trying to find themselves in western nations and they are comparing labour conditions and salary ranges. What our attitude towards this trend should be? Is it necessary to include it into the basis of future policy?
Oleksandr Parashchiy
Actually, they question of how to return those already abroad is a challenging one. According to official statistical data, a third of the population who left after the 24th have already come back. A half of those remaining abroad are intending to come back and a third of those who left will be looking for chances to stay there. 1 September when the children in Central and Western European countries go to school will be a critical date. Many of the Ukrainians who left are already attending foreign schools though this is not a mandatory requirement for them. From 1 September, school attendance will become a must rather than a matter of free choice. It will mean an entirely different level of perception, and it will be much harder for them to return as the curricula in the West are not quite similar to ours. That is, even if children return from foreign schools, they will have to adapt anew – another barrier for those thinking about going back.
Yet another nonetheless important issue is capital flight. Many of the Ukrainian businesspersons now feel sorry for having invested most of their money in Ukraine. That is, they have considered themselves Ukrainian businesspersons thinking they have best opportunities and prospects here. At some point they did get competitive advantages in this country but the last three months have brought new risks for them. Now many Ukrainian businesspersons will be diversifying their business, particularly, geography-wise. This will mean they will invest much less in Ukraine rather looking for opportunities abroad. This will be a huge problem on the way towards our economy’s post-war restoration.
Businesspersons will not be inclined to restore their businesses and assets that were destroyed by war at same locations where these were lost. A half of them are ready to seek opportunities of making their money work abroad. This may also be a problem when compensations for destroyed assets will be paid.
– A recovery will start after the end of the war. What can be the source of our resilience before the end of the hot phase of the war and stabilisation?
Olena Bilan
Stability components were laid in the first days and months of the war. Firstly, the banking and payment system was operational – a very important thing. Secondly, communication: the Internet and cell phone communications worked almost throughout the country. This makes the basis of our future sustainability. It is very difficult to think about economy growth in wartime circumstances. International support remains important; now it is focused at military and involves humanitarian aid. Money is received by the budget to pay salaries, retirement benefits and additional military expenditures. Our partners are currently ready to provide more than 30 billion US Dollars, which makes for yet another rather important sustainability component.
It is necessary now to create all opportunities for business relocation not abroad but to the western Ukraine. There are already certain governmental relocation programs but transferring manufacturing facilities is only a part of the matter. The problem is how to provide accommodation for people as there is practically no affordable housing. If the programs would kick off to allow for fast completion of development projects already in the penultimate stage of completion in the western Ukraine, it would help business and the economy.
The general economic policy is aimed at maintaining the macroeconomic stability and preventing the exchange rate from reaching the level of UAH40/USD. The Government, the National Bank and other government bodies authorities will try to preserve the economy and the stability of the currency market in the difficult wartime conditions. There may be some temporary distortions on the cash market though we should generally remain within the corridor of up to UAH35/USD.
– When the recovery process starts, something will be compensated and rebuilt transforming the demand in adjacent sectors. How is this to happen to make it comfortable for businesses, and what will the State’s role in this be?
Oleksandr Parashchiy
The role of the State in the process has to be pivotal. This does not mean though the State will have to intervene in every aspect. Ideally, the State should create conditions for business that will be better than in a neighbouring Poland, Slovak Republic or Germany. This is the biggest challenge given these countries already offer some decent, transparent and comprehensible conditions. Meanwhile, we have little to offer to businesses but for serious risks and some tax benefits. That is, we will unfortunately have to dwell for some time on international assistance, which is not unlimited and will sooner or later dry up.
It is important for the State now to create conditions for attracting exactly the foreign capital. In 2005 – 2008, the best years when the Ukrainian economy was showing almost 10% real growth a year, it was the private investments that worked as a growth driver. Without normal conditions for private investment, nothing will happen. Yes, we can rebuild roads, bridges, schools, theatres and plants but by doing so we will simply reach the level at which the war broke. Too little for Ukraine to feel a real economic boom. Yes, there will be money pouring in and additional jobs will be created to recover bringing statistical positives for the economic growth – but it will not be enough. We need to create pools of investors ready to come and invest on the backdrop of Ukraine’s popularity without expectations of sky-high profits, and we need it now. Make no mistake, there will not be high profits here – but there will be super-opportunities, and new niches may emerge.
Right now, Ukraine is still popular with the world like it was after the Orange Revolution. Our current task is to make the country popular as it was in 2005 during the post-Orange Revolution period. The key thing is to avoid the mistakes we made in the past 5-7 years when Ukraine lost its popularity with investors after the Revolution of Dignity.
Olena Bilan
Ukraine now has a unique chance of not just restoring everything we had, not just rebuilding it but rather modernising the economy, reshaping it in a more efficient and productive way. Most of the efforts should be focused on this. The recovery is the most important matter for businesses. We are now building a new Ukraine rather than rebuilding the old one.
-What percentage of the real working population is currently abroad?
Oleksandr Parashchiy
With no official statistical data to quote from, it can be guessed at 15%.
Olena Bilan
Now mostly women with children, their parents and the elderly have left. Of those 4.5 million people who are abroad, about half are women who can potentially work, which makes approximately 15% total population that worked in 2021. A difficult question, because even if all of them return there will be no work for them all.
– Are there possibilities of boosting Ukraine’s military and industrial complex in the nearest future?
Oleksandr Parashchiy
The main task for our military and industrial complex now is to survive. Our Armed Forces are good in promotion.
– What will happen to the structure of exports? Will agricultural commodities come to the first place? What are our grains used for? Will this facilitate their processing in Ukraine in order to export more processed goods? Are additional measures required for this?
Oleksandr Parashchiy
This may fit the concept of modernising the economy of Ukraine. For decades there have been discussions about processing grains here rather than exporting them. The only thing to change in the past ten years has been vegetable oil production, which has increased significantly. This is a progress to show we can really go on with processing. The State cannot affect the process forcing people to process more. You can, of course, introduce an export duty on grain but it will not be an incentive. An incentive would be the improvement of the investment climate.
– What will happen to personal wages that devalue because of inflation and related price hikes?
Olena Bilan
The situation for both those who stay and those who left is really difficult in terms of salaries because many businesses cut payroll. There are people on the labour market who have lost their jobs and find it now rather hard to become employed. Many of them agree to lower salary ranges.
We will win the war, and the economy will be better in the future than it was. The question is how to hold out until the victory. From the point of view of an lay person, a low salary is better than no salary. Unfortunately, we will have to accept what we have now. Currently, significant investments are only being made into military actions.
– If the ports remain blocked for the next 3-6 months, which economy sectors might become temporary/partial “compensation” for traditional export commodities (steel, grain)?
Olena Bilan
The ports will most likely remain blocked for 3 to 6 months under any scenario. On top of the Russian navy stationed there, the Black Sea has been mined twice by both the enemy and our military. Mine-clearing operations and insurance for vessels shipping steel and grain will take some time – think of six months. The cargo-handling capacity of our land routes is expanding, and this can become a compensation. Another our main hope at the moment is export of IT services.
– What is your assessment of prospects/risks of NPL build-up in the banking system?
Oleksandr Parashchiy
From the statistical data of the National Bank, we have no big problems with not serviced or paid loans in the banking system. Perhaps there are some banks that are find themselves not in the best situation but the NBU is in no hurry to take serious action even against them. Therefore, the issue of NPL or bad loans will be rather solved after the war ends.
– To attract private capital and create conditions for the realisation of opportunities, it will be necessary to design guarantees for capital owners in view of reduced domestic consumption. Is it possible to calculate the payback and profitability of projects and what tools can be used to provide private capital with guarantees?
Olena Bilan
The question about guarantees to private capital is a very important one. I cannot give a detailed answer at the moment about tools to be used to make businesses feel safer and be able to invest at least in something during the wartime.
– What can Ukraine realistically offer to western investors?
Olena Bilan
It is difficult to offer Western investors anything else besides recovery prospects now. If Ukraine could really follow the steps of its neighbours who are members of the European Union and get the prospect of membership, then, after our Victory, the investors will be happy to help restoring the economy and making good profits in the process.
Oleksandr Parashchiy
To my mind, we can only offer some hype so far: you are not investing in Ukraine? Then you are not in the trend. However, we can offer some new unique niches on the market: who is going to be the first to come and grab a niche that either has become vacant or has not been there until now? There are also prospects of integration with the EU – for example, for Eastern investors who have high barriers with the European Union. We already live in a regime of free trade with the EU, so the Chinese, the Kazakhs and Persian Gulf countries can set up companies here to supply their products duty-free to the EU.
The European perspective is a very good enhancement of our investment appeal. In this respect, it is western European governments that could help us if we have a very specific EU accession action with specific deadlines included. If we are going to strictly follow the plan, Ukraine’s investment attractiveness will grow, smoothly but quite substantially.
– To which extent is the shadow economy compensating for war losses and downturns?
Olena Bilan
The shadow economy sector is a compensator in the sense that people had shadow not declared savings that are now used to help support the domestic consumption. Given that we do not understand what is currently happening to the official economy, it would be difficult to keep tabs on the shadow economy. With any crisis, the share of the shadow economy grows.
– If you were asked as analysts whether to buy Ukrainian Eurobonds and GDP warrants at their current rates, what would you advise?
Oleksandr Parashchiy
Before the war, the conditional interest rate on Eurobonds was 10% with 0.5% in Europe. That is, if someone now buys a very expensive bond and believes in Ukraine’s prospects in the EU, then he can expect that the bond to significantly increase in price. Whoever invests in Ukraine today can get good rates. If we are part of the family of European countries, then these rates will be sky-high vs. the European ones.