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The forecast of the IEE #3 (59). Economic dynamics in Ukraine for 2007

Predicting for 2007 economic dynamics, analysts of our institute have faced with the uncertainties reducing a forecasting time till the semi-annual period. Thus, approximately half a year is rather "transparent" period, however not on everything, but only on some parameters. Till this period the general economic situation, dynamics of growth in industrial productions, growth of gross domestic product, will depend on current tendencies of macroeconomic policy. With the last conclusion club members of analysts also agree. In our country, it is always possible to expect unexpectedness from politicians. However, though risks of crisis from actions of politicum always take place, in the present period these risks look, as it seems to us, less strong, rather than before.

At the expiration of approximately the semi-annual period by virtue of action of the mentioned factors of uncertainty, look ahead parameters for 2007 in Ukraine forks on the script. It first of all concerns to the parameters introducing in economy costs and costs influencing inflation, and also growth of streams of the capital making these costs.

As a whole, in case of use of simple linear models of forecasting, the gain of real gross national product at the end of the year makes 8-10 %, and inflation - less than 9-10 %, with other things being equal. For the inquiry it is necessary to notice, that the forecast of the international experts for 2007 across Ukraine provides reduction of rates of increase of gross national product in comparison with 2006 up to 4-5 %, and inflation - at a level of 9 %.

It is simply to predict course of exchange in Ukraine. Considering two factors: 1) the arrangement between monetary and financial sectors about a rate 5, 1 grn. for US dollar; 2) enough big first line reserves (more than $22 billion) - it is possible to be assured, that by September 2007 such rate will be (5, 1) if do not arise external risks of a collapse of dollar which analysts expected in the end of 2006.

Nonlinear models of economic dynamic speak about the beginning of entry of economy of Ukraine in a crisis phase of a business cycle. For this reason even one insignificant event, an incorrect step can cause the crisis processes reducing a gain of gross national product up to 2-4 %. However even negative possible scripts do not show reduction in rates of increase of gross national product below 2 %.

Together with this factor on real parameters will render strong influence a buoyant vector of restoration of potential of the economy lost after deep crisis of 90th years. It means, that the economy of Ukraine has all chances to increase growth even more than 12 %, however to reach it in present conditions, one can not do without radical changes of innovative policy, structure of economy, and also without radical reduction of transaction costs. And with this a hitch is observed here.

Much will depend on force of risks.

In 2007 on the forecast for Ukraine following risks will be imposed:

 1) distortion of the economic information, therefore process of formation of innovative priorities of economic development will be hindered;

 2) incompleteness of processes of restoration of economy after crisis of 90th years;

 3)  introduction of economy into an initial phase of the first natural economic crisis;

 4)  further aggravation of a general demographic situation;

 5) continuation of processes of a rise in prices on the real estate;

 6) continuation of stagnation on equity market;

 7) growth of the criminal statistics connected with economic activities;

 8) risk of the overestimated significance of an official course of exchange;

 9) external risks of fluctuation of a conjuncture on resources (petroleum prices, gas and metals are more inclined to downturn, rather than to growth); the crisis potential of economy of the USA because of double deficiency (the state budget and the balance of payments) more and more collects; causes alarm not quite precise monetary policy of the European Central bank and FRS, and also growth of merges and absorption in the Europe on a background of instability of the finance of corporate sector in the USA and in the Europe.

 Risks of distortion of the economic information, caused by distortion of the structure of the relative prices.

 The given kind of risks is characteristic for the countries which economy is clamped by tools of monetary and fiscal policy. Ukraine which imbalance of economy continues to cause deficiency on the innovative goods and separate kinds of services, unfortunately, concerns to number of such countries too. This distortion causes a rise in prices on commodity markets. This distortion in separate sectors of economy is transmitted to the national market in the form of the general rise in prices. Struggle against this growth only cleanly by monetary measures requires monetary contraction up to the size providing a rate of inflation even at a level of 5-10 %. This reduction of the money offer is necessarily reflected in significance of factor of monetization. For the developed countries where the potential of economy is used more effectively, the given types of risk are not actual. They represent danger to Ukraine, the country which in many respects aspires to get knowledge of use of tools of monetary policy at the foreign colleagues, who do not face noted problem. Significance of factor of monetization of the Ukrainian economy as of the end of 2006 – is about 43 %.

 The inquiry.

 Economy is in "rate" when this factor makes 70 % (or even 60 %). It shows what amount of money serves economy, whether there is or there is not a money pressure in it. It is necessary to recognize, that a measure of deduction of a low level of monetization in Ukraine is forced. Having finished, in present conditions, monetization up to "rate", the NBU would cause inflation, approximately 60 %.


Risks for Ukraine, unlike the developed countries, in this case, are shown in the form of distortion of the main (money) market of the country that brings distortion of all other markets. The relative prices suffer first of all, and their structure cannot be replaced by anything because of informing importance for definition of utility of the new goods and services - definition of a vector of innovative development - for the sake of what we have gone on market transformation of economy.

The economy of Ukraine, continuing to remain pressed by the tools of monetary and fiscal policy, will distort the important market information. The distorted information proceeding from primary markets, as a rule, does not reflect real needs of two important institutional sectors of economy - house facilities and corporations.

Danger of this risk is that it hinders formation of effective priorities of innovative development, so as the strategy of economic development. Substitution of this information only the information produced by a scientific complex, inevitably conducts to occurrence of pseudo-priorities and pseudo-innovations, and a mistake with realization of priority directions, accordingly, - to the growth of risks of social and a political tension. It is not necessary to go far to have the example - it is a sad destiny of former Soviet Union.

It is important to remember, how one can easily get in the trap of illusions connected with externally stable macroeconomic parameters. What does it mean? The economic system as it appears, can show good, not crisis macroeconomic parameters (for example, inflations and a gain of gross national product) both in case of with healthy economy, and in case of (as in Ukraine) with economy of "patient". However in case that the economy is struck by illness of crisis, despite of rather safe parameters (growth of gross national product and inflation) surely the tools of economic policy will be distorted  and first of all this distortion will be shown in monetary tools.

 Here in Ukraine it finds out, as it was marked, through the factor of monetization of economy. However tried the NBU to hide the significance of this parameter behind various other parameters, for example, money growth rates and a monetary base, even growth of the factor of monetization, its low significance signals about the latent crisis processes which have been driven inside the economic system. In this case this is an important fundamental parameter and if in short-term prospect (year-two) it is not possible to increase a monetization, it will necessarily pour out (in intermediate term prospect) in an economic crisis. The last « itself will settle » all the infringed proportions, but will restore them at lower level of gross national product.

It is possible to admit such a script when the state due to super efforts will constrain the crisis caused by a disbalance of economy not by innovative processes, but clamping economy by a vice of monetary policy. In that case with complete reliance it is possible to predict an aggravation of demographic crisis which is not avoided in this script (it "will adjust" a population to economic opportunities of the country). In the latter case there are also other risks (for example, social or political) crisis.

 In spite of the fact that the low level of factor of monetization of the NBU keeps forcedly (as far as it allows inflations not to be increased) the reason of inflation and low monetization is covered in imperfect structure of real sector of economy. The last it would be possible to charge to absence of innovative policy of the previous governments, however for the innovative policy equally in charge both the government and the central bank.  Our NBU in this respect has a success. On a background of a low level of macroeconomic culture for deputies and other politicum, unlike other countries, for authority suffices intellectual forces to reach only the analysis of fiscal policy. In all other cases there is an impression, that they simply do not understand how the monetary tool works regarding management of national economy (except for regulation of the money offer and deduction of inflation). Therefore it is not troubled, though, likely, it is even well.

 Risks of incompleteness of restoration of economy after crisis of 90th years

  Two powerful vectors still continue to put pressure upon economy of Ukraine - buoyant and bearish. The general result of a picture of economic dynamics in many respects will depend on resultant significance of these vectors. The first, buoyant ("bull") is caused by a proceeding process of restoration of the potential lost in 90th years destroyed by system crisis. Restoration of this potential on the whole complex of the reasons was stretched for too big period (see figure 1).

Our earlier researches of cyclic dynamics of economy during various epoch shows, that the crises similar gone through Ukraine in 90th years, usually did not exceed 10 years though sometimes there were cases when they proceeded about 12 years. That is, present crisis should end approximately by 2000. Under the ending of crisis we understand not so much the occurrence of the fact of a positive gain of gross national product, but the achievement by real significance of gross national product of a pre-crisis level. For Ukraine, it is a level of gross national product of 1990 (a trajectory «1» on fig. 1).

 However Ukraine has got in an unprecedented situation. First, in economic history till now there was no similar case that gross national product of the country or group of the countries has fallen more than to 60 % in a peace time. As a matter of fact, here in Ukraine it also was possible "to manage" smaller losses, for example, even in thirty percent of reduction in gross national product. (A curve «1» fig.1) shows the first script of succession of events, what could be a prospective trajectory of gross national product. However in 1993 in economic policy there was something that has sharply changed dynamics in the worse part. Considering hypothetical scripts of economic dynamics it is possible to notice, that «something" has occurred in 2002, and also in 2005 (curves «2» and «3» on fig. 1). As a result restoration of economic potential was stretched in time.

 Therefore, secondly, even without any statistical or analytical processing it is easy to see, that after 2006 the gross national product of Ukraine still has not reached a level of 1990. From this the simple conclusion follows, that in 2007 the economy by virtue of natural processes of self-organizing will be on rise, i.e. will aspire to restoration of potential lost before. And it is that buoyant vector. There would be no happiness, but a hoodoo helped.

 In occasion of this vector there were many discussions. First, Gaydar's Russian institute confirmed, that regenerative growth after crisis should be small. Some of our institutes (for example, НИСИ) in 2005 declared, that the economy of Ukraine has finished regenerative growth. It is quite possible to understand debate ness of a question, but as it is visible, the economy has for the present left on a level only 1993 and aspiration upwards of trajectories of its gross national product is simply obvious.

The introduction of economy into an initial phase of the first natural economic crisis

 Without dependence from the fact of availability of a buoyant vector, in economy there are also other processes of its self-organizing. In Ukraine it has so coincided, that together with occurrence of the first significances of a positive gain of gross national product the intermediate term business cycle which completion should take place approximately by 2012 has begun. It means, that on logic of cyclic dynamics after 2006 Ukraine should begin entry in the first economic crisis natural to market relations (not to confuse process of entry in crisis to actually crisis phase of a business cycle). And though as a result of mistakes of the previous government the crisis potential has been a little bit pulled out in time, this process makes a basis for the second, bearish ("bear") vector of economic dynamics. 

 Similar sort of crises - is the objective reality, their display is the genuine certificate of transition of economy on market relations. On the contrary, when natural time of crisis comes, and crisis is not observed, it much speaks both about a condition of system, and about tools of management of it. For our case it can testify to strengthening administration managerial control by economic processes. So, for example, in days of the USSR a cyclic picture of economic dynamics was not observed at all. In case of complete domination of administrative tools of management by economy above its natural processes of self-organizing, negative consequences arise, as we already marked, because of risks of the distorted information. The economy loses reference points of a correct (natural) vector of the development. In that case they are usually substituted by schemes of management of scientific and technical progress, and planning of financial streams by a principle « from reached », from "last year's".

Frankly speaking, the size of this bearish vector is at present difficult for determining. Many crisis components as we already spoke are clamped by a vice monetary and a state policy though we shall already observe displays of a coming nearer crisis in 2007. On the general set, we assume, that the positive vector (growth of gross national product) still remains strong. And gross national product will be positive in an interval from 8 up to 12 % depending on realized policy and risks. If it is necessary to take the amendment on the realized policy for the developed situation the given structure of the government is in condition to choose significance of a parameter more close to the top rod.

 A proceeding aggravation of a general demographic situation

 Reduction of a population as we already marked, is consequence of reduction of gross national product, and together with it reduction of demo economical niche of people's dwelling. The economy became too weak to support 50 million people; therefore there is a self-regulation of number. For today Ukraine loses monthly approximately nearby 33 thousand (in a year - one third of million) persons: someone has left for emigration, birth rate has decreased, and natural death rate has increased. As a result there are only 46 million people. If process of an exit of a trajectory of a gain of gross national product on a former level (1990) will be delayed for five years, Ukraine can lose more about 10 million people. It is necessary to pay attention, that this factor also is risk of reduction of a gain of gross national product because with leaving the population (especially emigrants), the quantity of the workers creating gross national product is reduced. It is known, that each percent of the left workers can cause reduction of a gain of gross national product up to two percents.

 In 2007 the metropolitan housing accommodation and the metropolitan land will continue to rise in price

We repeatedly specified that one of the main reasons of growth of cost of housing accommodation is absence in Ukraine really innovative priorities. A principal cause causing aggregation of capital in such unusual form the Ukrainian politicum has not overcome. Though in 2007 except for pure economic forces of pricing in the market of housing accommodation fiscal are added. We predicted it earlier and all our forecasts, unfortunately, have completely come true, both in 2005, and 2006.

 Speculative boom in the market of housing accommodation - is the result of short-sighted policy during the previous periods. The speculative boom should be on finance, investment and money markets as the result of an attraction excess profits which promise innovative sectors. As neither in 90th years, nor in the beginning of the XXI century the government, the president have not managed to create innovative economy and tools of management of system innovative processes, people (investors) now have no place to invest the savings and augmentation of their incomes. That's why they are put in metropolitan housing accommodation.

 Exaggerated by speculations market of housing accommodation in capital - is the indicator of absence of system innovative processes. In fact the Ukrainian speculators do not put money in housing accommodation of the European capitals - it is cheaper there now then in Kiev. There is no such liquidity and speed of the turn-overs that allows making money. The present market of the real estate - is a bright example of what could be the innovative sector. However, the innovative sector is even more attractive, for unlike the housing sector; the constructed factory lets out the goods, gives jobs, increases incomes in economy, and thereby distributes on regions waves of economic activity. Unlike real sector of economy, the housing accommodation absorbs investment resources, construction materials, but by its nature cannot provide economic feedback.

 As in economy there is no innovative sector, people do not receive additional revenues which lately often began to name « the innovative rent ». As a result the growth of tariffs will mean inclusion of redistributive processes in the environment of house facilities that is fraught with risks of revolutionary explosions. If in economy there were innovative processes then the growth of tariffs would mean the growth of social standards and the growth of security.

 In 2007 we expect, that the rise in prices on housing accommodation at last will be thrown on regions though this was expected in 2006. Most likely, and in 2007 equity market will not work, and for this reason, for the lack of the civilized mechanisms of an interbranch run of capitals and system innovative processes, it is necessary to expect continuation of direct raider attacks and other, their modified kinds. Probably only to 2008-09 at last will work equity market, but, we suspect, that for this purpose the developed system of political-economical relations should break 

Risks of the overestimated course of exchange

As the indicator of the overestimated course of exchange serves the condition of the so-called current account of the balance of payment. As it's known, it is a difference between cost of export and import money transfer deeds: the overestimated course of exchange causes growth of import and decrease in export, its indicator is the negative balance of the current account position; the underestimated course of exchange will cause growth of export and decrease in import, the indicator - is the positive balance of the current account.

 Here in Ukraine the positive balance of the current account position was till the third quarter 2005. After in April 2005 NBU from submission of the government has revalued grivna, balance of IV quarter 2005 became negative, and today it makes a minus $321 million (by the way, it is a direct minus on the same size of gross national product). On documentary group the negative balance has made one and a half billion US dollars (1,471). On this size Ukraine has received growth of the external documentary expansion created by its own hands. This growth of the offer of documentary weight should put pressure upon inflation, having suppressed it up to significance of 8 %. As in these conditions on results of 2006 Ukraine has received the inflation considerably exceeding 10 %, it means that in 2007 under condition of achievement of positive foreign trade balance price risks increase.

The overestimated course of exchange has rendered in 2006 negative action on growth of incomes of corporate sector (except for export directed branches, for example, to metallurgy, etc.) and, as consequence, sectors of house facilities. Small and average business has a little suffered. Mass actions of reduction of prices in commercial network with the purpose of stimulation of turn-overs have taken place. In summer 2006 growth of debt and creditor indebtedness in corporate sector was marked.

 Under condition of restoration of positive balance of the balance of payments in 2007 all these defects can disappear, except for as it was marked, growth of risks of inflation.


In general in 2007 in economy of Ukraine should be marked the process of decrease in possessed incomes on a background of the general growth of streams of the capital and incomes. 

 1. The economy of Ukraine stands on a threshold of the first evolutionary-natural economic crisis.

2. In a crisis phase of a business cycle the economy has begun entry prematurely, that can disperse potential of crisis in time.

 3. In Ukraine the beginning of new system innovative process was delayed that threatens with activization of a lot of the risks threatening by aggravation of crisis processes.


1. Many of the named risks can be overcome by application of new technologies of realization of innovative policy, for example, by creation of innovative system. Considering it, at formation of offers on a drafting of the Public finance of Ukraine for 2008, it is necessary to consider a number of actions on creation in Ukraine National innovative system.

2. Radically to change the monetary policy from the strategy of "pumping out" of incomes from economy by banking system with the help of high interest rates to the strategy of growth of its power by financing system innovative process and growth of a banking system together with growth of innovative structure of national economy, thereby, having strengthened an economic component in the policy of the central bank.

 3. To pass to the active policy of stimulation of development of the market of forecasts.

 4. To refuse rigid monetary policy, gradually having passed to flexible with targeting inflation. Due to decrease in crisis potential of economy by innovative development of its structure, to increase business and innovative activity, including increase of factor of monetization. 

5. To stop pumping out and without that scarce means from economy due to its dollarisation, completely having passed to national money that the item 99 of the Constitution of the country requires.

 6. To promote creation of open, not exclusive scientific space, and on this basis to create a perfect market of forecasts, including foresite. Researches show, that in the developed countries of the world financing of scientific researches is distributed as 33 % - the state scientific sector, 33 % - a private sector, 33 % - the mixed financing.

 7. To promote activization of equity market, institutes of bankruptcy, an interbranch run of capitals and development of ventures.


Igor Makarenko 

Posted on the website: 2007-02-06

Comments on this article:

Прогноз ИЭЭ #6 (69). Мировая экономика получит импульс экономической активности в начале 2009
 среду 08.10.08 семь центробанков мира одновременно понизили учетные ставки на 0,5%
The forecast of the IEE #3 (59). Economic dynamics in Ukraine for 2007
In 2007 on the forecast for Ukraine following risks will be imposed
The forecast of the IEE #2 (58). Currency tendencies for 2007

Summing up 2006 it is already possible to speak, that for US dollar it was one of the best periods. We shall recollect even the end 2004 beginning of 2005 when its rate has sharply gone downwards in relation to practically all leading world currencies

The forecast of the IEE #8 (47).

In political relations between Yushchenko and Timoshenko eccentric events must happen to May 2006 (the Forecast on Hlebnikov Part 3)

Forecast IEE #7 (46). Europe: simultaneous growth of risks and sociopolitical pressure
The increase in the discount rate by the European central bank (ЕCB) in 2006 will cause a growth in the risks in the economies of incorporated Europe
The forecast of IEE #6 (45). Exchange risks of the world in 2006
afraid, that in the second half of 2006 the dollar exchange rate in the world exchange markets can fall to 30 % - 45 % in relation to ...
IEE Forecast [16]. Ukraine will not avoid crisis, if not to take precautions and not to start innovative processes
After year 2006, the economy of Ukraine will step in a phase of its first serious economic crisis
IEE Forecast (15). American economy will absorb the world capitals like a powerful pump in 2005
Even today we may predict the result of a FRS experiment on driving of the American economy from " a soft patch " at the beginning of 2000
IEE Forecast. If there are no innovative priorities, the habitation market will become a risky point of the fund for business and investors.

The real estate sector is a small drop, and but for economy it reflects the bitter history of Ukraine, and (without exaggeration) all the CIS history.

IEE Forecast (13). Investments outside of systemic innovations go "nowhere": on the lot of oil and dollar
World prices for oil and dollar exchange rate will be "the valve of constant pressure " for economic growth
IEE forecast and comment (II). If the discount rate will raise, dollar will strengthen
Though practically nobody doubts a possible FRS decision to raise a discount rate by 0,25 %, the world of analysts of the currency market has stopped waiting
IEE forecast and comments. On a sudden problem of " canceling of the obligatory sale of 50 % currency proceeds"
Political risks in management of economy do not weaken in Ukraine. That can provoke an economic crisis even in a short-term prospect (after 2006)
IEE Forecast. Dollar, oil, steel, and the global innovational system will influence the world dynamics
Factors, which will influence economic dynamics in the nearest future
IEE Forecast. Ukrainian economy is most likely to remain excessively dependant on tools of economic policy in 2005
Most likely, innovative processes, capable to bring Ukraine forward at any commodity or technological sphere will not start in
IEE Forecast. The World Economics Will Run a Fever For Some More Time
According to leading economist's opinion, continuous decrease of long-term rates in the world's most developed countries is one of the greatest puzzles in the financial world today. The problem is important for the USA, and other national economics
IEE Forecast. The World Economics Will Run a Fever For Some More Time
The world economics will run a fever for some period (5-10 years). It will suffer decreased production effectiveness, raised consumption of oil in China, price fluctuations for fuel. After that, we will experience an unprecedented and grand innovational project. The project will change the quality of all the world economics, absorb all the free capital, and increase long-term yield.
IEE Forecast: Growth of a dollar exchange rate can cause growth of the external economic risks for Ukraine
As to the internal factors, which compensate specified risks, it is necessary to carry significant potential of economic growth to them due to activization of internal consumption. It is a question of activization of the factors removing restrictions on ways of incomes growth of people, of fine and average business.
IEE Forecast. In economic there can be a slow economic growth with the crisis periods
The deficiency growth of the account of current operations in the USA is connected first of all with smooth and deep downturn of a discount rate.
IEE Forecast: on a dollar exchange rate, OPEC conference, and session of FRS board, Bush's speech and meeting of G7.
Events of this week will leave the trace in 2005 World discussions
IEE Forecast
The committee for Federal Reserve System (FRS) in the USA (FOMC) will raise a discount rate for 0,25 % having brought it up to the value of 2,50 % at the next session, which will take place on February 1-2, 2005.
IEE. In the coming year the price for gold will continue to grow
Gold already would seem ceased to carry out function of money, again in the price because of the monetary markets dynamics.