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Ukraine suffers second-worst contraction on record

KIEV (Bloomberg) -- Ukraine’s economy shrank an annual 18 percent last quarter, the second-deepest slump on record, after industrial production and retail spending plunged.

The fall in output followed a record 20.3 percent contraction in the first three months of the year, the Kiev- based state statistics committee said in a statement on its Web site today, citing preliminary figures. The office is due to publish details when it releases the final report on Sept. 30.

The commodity-driven economy slumped after demand for steel, Ukraine’s biggest export, faltered and its related industries sagged. Reliance on foreign-currency borrowing pushed Ukraine’s banks into decline, with 17 lenders now under central bank control. The former Soviet state is relying on a $16.4 billion International Monetary Fund bailout to avert default. Gross domestic product will slump 14 percent this year, the IMF estimates.

“An ‘improvement’ from minus 20.3 percent to minus 18 percent is still a huge negative in anyone’s books,” said Timothy Ash, head of Europe, the Middle East and Africa research at Royal Bank of Scotland Plc in London. “The third quarter will probably also show a steep decline, but favorable base effects might ease the year-on-year decline in the fourth quarter.”

Ukraine’s industrial production has declined through the past year and sank an annual 26.7 percent in July, the state statistics office said today in a separate release. Steel production fell 30.4 percent in July, chemicals output slumped 31.1 percent and machine building dropped 52.9 percent. The three industries produce Ukraine’s main exports, which account for more than 50 percent of total output.

Metals, chemicals

Metals and chemicals producers including VAT Odeskyi Pryportovyi Zavod, Ukraine’s second-biggest ammonia producer, have posted record losses. VAT Azovstal Iron & Steel Works said on Aug. 4 it cut steel output by 37.5 percent from January through July to adapt to shrinking markets.

Ukraine’s hryvnia lost 37 percent last year against the dollar, making it the world’s third-worst performer after the Seychelles rupee and the Icelandic krona, and undermining banks’ efforts to repay debt. The currency has lost 3.4 percent against the dollar this year and was trading at 8.3323 at 2:14 p.m. local time.

An export and banking crisis has left domestic demand in tatters. Retail sales have slumped since June last year and plunged 15.9 percent from January through July, the statistics office also said today.

‘Depth reached’

“The depth of the recession has probably been reached,” Ash said. “I think Ukraine will be slow to bounce back from this.”

Political deadlock between President Viktor Yushchenko, Prime Minister Yulia Timoshenko and the parliament ahead of January elections is hampering an economic recovery. Yushchenko and Timoshenko can’t agree on how to spend budget funds, while Timoshenko has expelled two pro-Yushchenko ministers from her Cabinet.

At the same time, the pro-Russian opposition, led by Viktor Yanukovych, blocked parliament in June and July, delaying the adoption of laws needed to ensure the continued inflow of IMF funds. Yanukovych’s party has also stymied Timoshenko’s efforts to appoint a new finance minister, a post which has been vacant since February.

“The economy is on the recovery track,” Timoshenko said today at a press conference in Kiev. The government will base the 2010 state budget on an assumption of 3 percent economic growth, she added.

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