1)Challenges Despite doubling of the FDI figures

1)Challenges & Prospects

 

A.    Challenging FDI Flow

Best services for writing your paper according to Trustpilot

Premium Partner
From $18.00 per page
4,8 / 5
4,80
Writers Experience
4,80
Delivery
4,90
Support
4,70
Price
Recommended Service
From $13.90 per page
4,6 / 5
4,70
Writers Experience
4,70
Delivery
4,60
Support
4,60
Price
From $20.00 per page
4,5 / 5
4,80
Writers Experience
4,50
Delivery
4,40
Support
4,10
Price
* All Partners were chosen among 50+ writing services by our Customer Satisfaction Team

Despite doubling of the FDI
figures from its frightening lows in 2014, the truth remains that projected
figure of less than $1 billion in 2017 is a woeful fraction of the pre-crisis figure
of $8.4 billion in 2012 (Appendix –
Picture 10).However, a closer look at this trend suggests that the drop was
not entirely crisis-driven, as the 50% drop witnessed between 2012 & 2013 had
already set the stage for the ten-fold drop that occurred at the onset of
crisis in 2014. Even more interestingly,the FDI levels appeared to recover in
2016 hitting a $4.4 billion mark, before the current year’s precipitous
decline.

A fine-grain analysis of inbound FDI composition will throw
more light on these observations. This trend is characterized by a
disproportionate tilt to politically risky sources such as recapitalization of
Russian-owned banks (many of which are currently seeking exits), transient
special purpose vehicles (SPVs) designed for tax advantages which are
ultimately owned by Russian/Ukrainian investor and one-off transactions
undertaken by the likes of Arcellor-Mittal in the declining steel industry.It
is obvious that Ukraine’s attraction for foreign capital has been bound up in a
complex, which comprises of local oligarchy and Russia. FDI trends, thus have rarely
been dictated by forward-looking opportunities in the Ukraine. Investments have
been lacking in biotech, highly productive agriculture, pharmaceuticals,
consumer goods and private education, which are so critical to these fallow
economic sectors. Considering the levels of corruption in the country and
ongoing instability in Donbas, these challenges seem to be even more critical.

B.    Scaling Unemployment Rate&
Complex Fiscal Outlook

Recent projections suggest
that Ukraine’s unemployment will not ease below 8% till 2022 (Appendix – Picture 11). The slow growth
in GDP is partially responsible for this high rate of unemployment, but the
main causes are drying up manufacturing outputs and lack of service industries
in Ukraine. The business confidence rate & easy of doing business is on a steady
rise since 2015-2016, but on other hand corruption rank and competitiveness
index is not seeming to bein a healthy shape. All of these together are resisting
the unemployment rate for coming down. On the other hand, fiscal sustainabilityis
coming under pressure from lower social security contributions in 2016 &2017.
The fiscal deficit in2016 was 2.2 % of GDP (this is excluding Naftogaz debt
which is 2.1 billion USD), this figure was below the mark set by IMF (3.7%) but
still on a higher side(Appendix – Picture
12). In 2017, the fiscal deficit is projected to grow to 3.1% of the GDP.
One of the major fiscal weakness is in the shortfall of pension funds, which is
currently at 5% of GDP and is continuously rising. The reason is again owning
to declining social security contribution revenues which were at 5.5% of GDP in
2016. Lastly, the increase in minimumwagesby government is adding to the
problem, and is widening this fiscal deficit further.

C.     Analysis

Whilst
the ongoing IMF program has been justifiably focused on broad fundamentals, the
real sectors continue to face challenges with average mortgage rates at 30% and
commercial bank loans attracting an average interest rate of 18.5%. These rates
are pushed by measures like mass forced insolvency of more than half of
Ukraine’s banks since 2014, rise in inflation to 15%(way above the official
target of 9%) and a gradual easing of the monetary policy rate (hovering around
the 12.5% mark) which just two years ago was raised abruptly to 30%. The
economy growth (GDP) will remain positive but modest in coming years, no major
acceleration should be expected post 2017.

The
donor agenda – of which the IMF program is only one part – does not appear
poised to drive reforms fast enough due to the failure in correcting necessary structural
challenges. To this date only 50% of EU macro-financial assistance package,
which was worth$2 billion and was committed to Ukraine during the 2014-2015
crisis,has been released due to weak absorption capacity and planning gaps.
This is not entirely surprising, as a bigger package of $15 billion in loans
and grants designed in 2013still remained largely un-deployed. It is obvious
that whether it is lack in FDI, missing large-scale development cooperation or
the confidence of local investors, something deeply entrenched is eating away Ukraine’s
capacity to mobilizethis large amount of capitaland is directly hampering the economy’s
productivity & prospects.