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PRODUCT MARKETS AND INVESTMENT NEEDS OF UKRAINE D r. Volodymyr Vlasyuk Director, UPECO

PRODUCT MARKETS AND INVESTMENT NEEDS OF UKRAINE D r. Volodymyr Vlasyuk Director, UPECO Prague, 22-24 September 2010. I. Brief macroeconomic profile. 1. Current macroeconomic situation in Ukraine. Industrial production as compared to pre-crisis level, %. 6m 2008 = 100%.

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PRODUCT MARKETS AND INVESTMENT NEEDS OF UKRAINE D r. Volodymyr Vlasyuk Director, UPECO

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  1. PRODUCT MARKETS AND INVESTMENT NEEDS OF UKRAINE Dr. Volodymyr Vlasyuk Director, UPECO Prague, 22-24 September 2010

  2. I. Brief macroeconomic profile 1. Current macroeconomic situation in Ukraine Industrial production as compared to pre-crisis level, % 6m 2008 = 100% Source: State Committee of Statistics of Ukraine Industrial production in Ukraine have not yet reached pre-crisis level. That’s why Ukraine is still de facto in crisis phase. According to the expert’s estimation, pre-crisis level of it’s industrial production and GDP Ukraine will reach only in 2013-2014

  3. I. Brief macroeconomic profile 2. Expectations for Ukrainian economy in 2010-2015 Ukrainian GDP growth rate, y/y Source: State Committee of Statistics of Ukraine, IMF Ukrainian economy is to deliver moderate growth (3,7%) in 2010 bouncing back from distressed level of last year (-15,1%) and accelerating from 2011 onwards due to broader global growth. Banking crediting activity in Ukraine is still low – total volume of credits showed 1,5% decrease starting from the year

  4. II. Ukraine needs investments 3. The dynamic of investments in Ukraine FDI in Ukraine, USD mln. (annual figure) FDI in Ukraine, USD bn.* * cumulative Source: State Committee of Statistics of Ukraine, EBRD Despite the cumulative investments at USD 40 bn. (2009), annual Ukraine's FDI in 2009-2010 remains insufficient for modernization needs due to economic crisis and political destabilization

  5. II. Ukraine needs investments 4. Correlation between investment and GDP ($337,3 bn.*) ($2 264 bn.) ($7 966 bn.) ($3 298 bn.) Source: State Committee of Statistics of Ukraine, National Statistics, IMF * GDP in 2008 based on purchasing -power parity Ukraine’s FDI per capita figure remains considerably less than in developing and advanced economies. Besides, In comparison with other developing countries, Ukraine has substantially less figure of investment in GDP indicating insufficient capital recourses to be addressed for modernization needs and low rate of economic renewal.

  6. II. Ukraine needs investments 5. Foreign direct investment in Ukraine by sectors Source: State Committee of Statistics of Ukraine At the end of 2009, the large average of Ukraine's FDI was in industry and financial services as result of the most investment attractiveness of those sectors in the previous years

  7. II. Ukraine needs investments 6. Investment requirements for some sectors of economy USD bn. Source: State Committee of Statistics, National Academy of Science of Ukraine * By expert's estimate that it is the minimum annual investment requirement over the upcoming 10 years Ukraine will urgently require a huge number of investments in fixed assets in order to modernize capital assets and cope with infrastructure gaps

  8. II. Ukraine needs investments 7. Volume of accumulated steel resources to be replaced Source: UPE Co. The replacement of depreciated steel-made facilities requires 328 mln. tonnes of steel. According to estimates of National Academy of Sciences of Ukraine replacement of fixed assets is needed to spend about USD 80 bn. in the nearest 10 years

  9. III. What is the attractiveness of Ukraine? 8. Preconditions for investment attractiveness of UkraineGeneral background • 46millions of inhabitants • Highest (6,4%) in Europe dynamic of GDP growth(except 2009) • High scientific and educational potential • Qualified and competitive labor force • Broadly developed transport and industrial infrastructure The above-mentioned conditions define the Ukraine’s investment attractiveness. In Ukraine we can find a significant number of successfully realized investment projects of well-known international companies: Kraft Foods (USD 50 mln), Cargill (USD 90 mln), Knauf (USD 30 mln), Telenor (USD 150 mln), ISTIL (600 mln.), Metro Cash@Carry (410 mln.), Eurocar (200 mln.) and others

  10. III. What is the attractiveness of Ukraine? 9. Preconditions for investment attractiveness of UkraineThe progress achieved over the last 5 years Ukraine is the member of the WTO (from 2008) Granted the status of a market economy country in 2005 Intensification of cooperation with IMF, World Bank, EBRD and other international financial institutions Resultant privatization (share of state property - 7%) Advance in joining to EU Free Trade Area

  11. III. What is the attractiveness of Ukraine? 10. Improvement of Ukraine’s sovereign ratings Presently 2009 Moody’s B2 (negative)B2 (negative) S@P CCC+/CB+ (stable) Fitch B (negative)B (stable) Political stabilization in Ukraine A new 2,5 year $15bn stand-by agreement with the IMF Starting economic recovery During this year Ukraine demonstrates improvement of it’s sovereign ratings due to political stabilization and renewal cooperation with IMF on Stand-by program

  12. III. What is the attractiveness of Ukraine? 11. Preconditions for investment attractiveness of Ukraine Sizeable domestic market and abundant resources Import volume of some industrial products in Ukraine in 2008, USD mln. • Rich natural resources: • 56% of Ukraine’s land is arable and • 1/3 of the world’s black soil • among 10 world countries with • the largest reserves of mineral resources • (iron, uranium ore, granite etc) • taking into consideration the import prices are up to 25-30 times less than market ones , • import of light industry products in Ukraine is estimated at USD 8 bn. Source: State Committee of Statistics of Ukraine Despite economic crisis and correspondent drop in private consumption, Ukraine’s domestic market is still very attractive for further import volume expanding

  13. III. What is the attractiveness of Ukraine? Average return of investment (ROI) in Ukraine is 30-40% per annum depending on projects and sectors (contrast to 10-15% in EU and USA) Building of poultry factory – 35%; payback period – 5 years Building of steel-rolling mill (1,8 mln. t capacity) – 29%; payback period – 4,5 year Building of grain terminal in Dnieper river port – 51%; payback period – 2 year 12. Preconditions of investment attractiveness of Ukraine High level of ROI ROI of some real sector projects in Ukraine: High profitability of investment reflects the fact of particular Ukraine's investment attractiveness

  14. III. What is the attractiveness of Ukraine? 13. Impact of import natural gas price in 2010 for Ukrainian balance of payments 100 USD discount Saving of USD 5,5 bn *including process and gas injected to reserves According to recent natural gas arrangements with Russia, Ukraine in 2010 will get USD 100 price discount per 1000 cubic meters. This discount will lead to substantial reduce (estimating USD 5,5 bn) the pressure for this year country’s balance of paymentsto be estimated at 4,3% of GDP

  15. A. B. In time VAT return to {foreign} companies Doing away with the Red Tape C. Legal system reform in line with one of the established European systems D. IV. Personal view and recommendations 14. Hindrances for FDI in Ukraine and actions of government to improve the situation Actions Hindrances • Level play for the foreign companies According to new Tax Code of Ukraine, it will be automatic and transparent VAT compensation Adopted laws aiming at deregulation of doing business in Ukraine, simplify the system of licensing and certificating Starting legal reform in Ukraine, Particularly In the sphere of courts Also, in accordance with new Tax Code of Ukraine, shipbuilding, light and aircraft industry are released from income tax over the next 10 years Despite the existing problems last initiatives and practical steps of government demonstrate the readiness of public elite to raise investment attractiveness of Ukrainian economy

  16. IV. Personal view and recommendations 15. Priority sectors for foreign direct investment in Ukraine • Shipbuilding, machine building, light, auto production, agricultural machine building as key investment-attractive sectors for foreign investors • N.B. We have pleasure to announce that we shall share the relevant information regarding the description of most attractive sectors in Ukraine for all potential investors

  17. UPECO Research@Consulting tel/fax (+38044) 484-64-83 e-mail expert@expert.kiev.ua

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