Page 10 - bne IntelliNews Country Report: Ukraine Dec17

collateral. But probably nobody will let us sell anything there," Kostin said on September 6.
2.4 Has Ukraine turned the corner?
A sustained improvement in macroeconomic fundamentals has helped Ukraine to shake off the label of ‘basket case’ and global markets are once again viewing the country with interest. While there is certainly upside potential for asset prices over the next couple of years, a volatile geopolitical and domestic political backdrop means that investors in the country will need a strong stomach.
Few emerging economies have had a more turbulent past few years than Ukraine. Since early 2014, a prolonged military conflict with Russia, domestic civil unrest and commodity market gyrations have taken a heavy toll on national income. Measured in gross domestic product (GDP) terms, Ukraine’s economy shrank by a massive 15% in 2014-15.
Yet, more recent activity indicators have been encouraging. The country exited recession in 2016 and annual GDP growth stabilised at 2.5% in the first half of this year. Ukraine has seen a marked improvement in inflation and public finances, and continues to adhere to the requirements of an International Monetary Fund (IMF) loan arrangement penned in 2015. Signs of greater macroeconomic stability have been recognised by external investors; in September, the government successfully placed $3bn in international debt.
Primed for an influx of overseas capital?
Verisk Maplecroft’s new Dynamic Macroeconomic Index (DMI) suggests that Ukraine’s fundamentals are as good as at any point since 2010. Updated once a fortnight, the index gives investors an indication of the economic health of over 20 major emerging markets. With an aggregate DMI score of 7.0/10 (where 10 is best), Ukraine currently outperforms all five of its regional peers.
Admittedly, the breakdown of the data paints a more nuanced picture. While Ukraine’s growth and inflation dynamics have stabilised and are in line with long-run trend rates, the country scores less favourably (4.0/10) when it comes to trade (the ‘External’ pillar). Exports plummeted in 2014 and, at just over $3bn per month, still only generate half as much income as they did prior to the armed conflict in the east.
The question for investors is: is the worst now over and has Ukraine become an interesting proposition from a value perspective? Asset prices are undoubtedly very low relative to pre-conflict levels. The benchmark PFTS equity index is 70-75% lower than in early 2011 and the hryvnia has lost a similar amount against the US dollar. Neither market has seen any tangible upside in 2016-17, despite an improving growth and inflation backdrop.
Political risk and corruption weigh on investment potential
In our view, however, there are three reasons why investors should retain a
healthy dose of caution when it comes to Ukraine.
First, the country’s improved macro-financial position could, ironically,
10 UKRAINE Country Report December 2017 www.intellinews.com