Ukrainian business, according to the NBU (National Bank of Ukraine) survey, is optimistic about the future and expects production growth. For a year Ukraine rose to six positions in the competitiveness rating of the World Economic Forum (WEF), taking eighty-third place from 140 countries. But the real competitiveness of both Ukraine and domestic business, compared to other Eastern European countries, remains very low. In the struggle for two main resources ‒ investment and labor, we still lose, mainly due to unsuccessful and short-sighted policy of the state.
WEF experts evaluated countries according to such criteria as macroeconomic stability, development of state institutions, infrastructure, financial system, labor market, commodity markets, business development dynamics, ability to innovate, technology adaptation. Unlike the World Bank Doing Business ranking, the WEF study contains more criteria and determines not only the level of the business climate inside the country but also the ability of the state as a whole to compete with other countries on world markets.
The top ten WEF rankings include the United States, Singapore, Germany, Switzerland, Japan, the Netherlands, Hong Kong (estimated separately from China), the United Kingdom, Sweden, and Denmark. We, having improved our indicators by a large number of criteria, are only in the eighth decade, alongside Argentina, the Dominican Republic, Macedonia, Sri Lanka, Ecuador, and Tunisia. The company is not bad, but we are not directly competing with these countries. For labor, we are competing with our western neighbors ‒ Poland, Slovakia, Hungary. For markets ‒ with such agrarian titans as Canada, the USA, and China. For investments ‒ with other developing countries from our region. Well, from the countries of Eastern Europe, we are ahead of only Moldova, which ranked 88 in the overall ranking, and as for the rest of our competitors, we do not even breathe in the back of their heads.
Ukraine has improved its results in infrastructure development, production skills of workers and the level of education, development of the labor market, and the growth rate of the domestic consumption market. However, this is not enough in order to withstand competition with developed economies. If state institutions do not work satisfactorily, the business environment is developing poorly, then qualified employees are more likely to look for work in other countries competing with Ukraine not only for markets but also for labor resources. And infrastructure development will not help here.
It will also be difficult to compete for investments because every investor usually evaluates the attractiveness of countries for investing in just the indicators according to which Ukraine took the worst places ‒ this is macroeconomic stability, development of state institutions, the financial system and the business environment. What actually influenced not the best result in the ranking overall.
Despite certain pinpoint positive changes in the economy and the social sphere, the state is still not ready to take the path of self-improvement and compete with neighboring countries for the resources that they urgently need ‒ human resources and money.
The NBU conducts a survey among Ukrainian enterprises on a quarterly basis, determining business expectations and the main problems that it faces in its work. The publication of the last such survey coincided with the publication of the WEF Rating, the results confirmed the assessments of Western experts.
The general business mood is optimistic. Ten quarters in a row, the NBU experts have fixed positive expectations of entrepreneurs, regarding the growth in the production of goods and services. However, business is smiling through tears. The share of respondents, who expect hryvnia depreciation, for example, increased to 90.3% (+ 12% compared to the previous quarter), respectively, the business expectations to accelerate inflation, which is directly related to the strength of the national currency, also increased. And despite the positive expectations for the growth of production activity, entrepreneurs note that the level of residual finished products is lower than their needs, and they lack their own capacity to increase production in the case of further growth in demand.
The most significant factors, limiting the ability of enterprises to increase production, are too high prices for energy carriers, as well as raw materials and materials. More than 60% of entrepreneurs expect that in the near future their costs of manufacturing products will increase. In addition to this, almost 66% of companies are counting on an increase in labor costs for employees. Accordingly, the percentage of companies, experiencing a need for borrowed funds remains quite high ‒ about 37%. However, they are not in a hurry to receive these funds. The percentage of companies, willing to take bank loans has declined for the third quarter in a row. Moreover, it is mainly the large companies that express such a desire, and small and medium-sized ones prefer to refrain from lending, even if they need additional money. The main reasons are too high interest rates on loans, excessive requirements for collateral, significant fluctuations in the hryvnia exchange rate and too complicated paperwork procedures.
It is here that the state, represented by the NBU, should help businesses and simplify access to lending, moreover, the banks have sufficient resources for this ‒ the inflow of ruble funds in banks is growing at a rate above 15% per year.
The NBU, in its Financial Stability Report, states that lending remains sluggish, the only dynamic component is providing loans to the population for consumer purposes (+39% current accounts on net hryvnia loans). Net loans to the population continue to grow rapidly (in particular, hryvnia loans +39%), but the reduction in corporate loans hinders the resumption of lending. However, the regulator of the banking sector does not offer any solutions to this problem.
But precisely because the NBU is aggressively raising the discount rate, trying to keep inflation, the value of money increases significantly. At present, the cost of a loan for a legal entity is on average 19.7% per annum. It is clear that there are few people, who want to pay so much for the use of funds, even less are left after reading the requirements for collateral, which were strengthened after the last crisis, and only real brave souls are willing to take the risk and go through seven laps of the bureaucratic hell, needed to receive a loan.
Of course, tightening the requirements for borrowers is a necessity, yet the Ukrainian banking sector is persistently moving towards world standards. But banks could simplify the procedure for obtaining loans so that they were interested in lending. In here, too, the decisive role played by the NBU. After all, the banking sector regulator, saving it from the crisis, did everything to ensure that banks received alternative opportunities for earning ‒ the NBU deposit certificates or government bonds of the Ministry of Finance allow banks to operate, avoiding risky clients from the market.
The biased attitude of banks towards corporate clients is quite understandable. Over the years, financial institutions have accumulated a significant amount of non-performing loans ‒ about 56% of the entire corporate loan portfolio. Now only every third client with a loan of more than 2 million UAH never allowed a default on loans. It is clear that the more loans the bank has that are not serviced by the borrower and “spoil” the balance of the financial institution, the less the bank’s desire to continue working with the business. But the banks themselves will not solve the problem of non-performing loans, given its scale. Here again, the decisive role is assigned to the state, the Ministry of Finance itself, which has been discussing the strategy to solve this problem for several years in a row, drawing diagrams, models and presentations, gathering discussions, but has not yet offered any specific solution that would allow banks to remove the burden of non-performing loans that would significantly revive their desire to lend to the real sector. The problem of non-performing loans is not solved for years. Banks independently restructure something, they write it off, but the pace is so low that, in statistical terms, the growth of the total loan portfolio is more affected by the reduction of the proportion of “toxic” loans than specific measures to reduce them.
Another incentive for the resumption of lending is the so-called law on the protection of the rights of creditors, which amends a number of regulations in order to systematize and fasten a permanent judicial and legal practice to regulate the resumption of lending. The draft of this law has lain for a year in parliament, awaiting adoption, now it lies in the President’s cabinet, for the third month awaiting signing. Despite the fact that the allotted 15 days from the moment of receipt were long gone, the law was never officially promulgated.
Obviously, the decisive role of the state is also in the matter of attracting foreign investment. According to the NBU survey, the number of companies that are willing to look for additional resources abroad is gradually increasing, and the expectations for a gain in Western investment in the Ukrainian economy are very optimistic. And the real data speak of a very low-key interest of Western investors in Ukraine.
The traditional National Expert Forum was held in Ukraine the other day, one of the panels of which was devoted specifically to the problem of attracting investment. “The goal is economic growth, not investment. But without a significant share of foreign investment, rapid growth is impossible. At the same time, it is extremely necessary for Ukraine to have not only high but also stable rates of economic growth, about 6-7% annually. Now the economy is growing at 3-3.5% annually. To double this figure, we need investments”, said Ivan Miklos, the Chairman of the Strategic Group of Advisors on Supporting Reforms in Ukraine, during the forum. “Research data suggests that only 50 countries in the world had a steady and high growth of economies, about 6% per year, over a long period. In all these countries, the share of investment in GDP in the years of intensive growth was 25% or more. With smaller investments, economic growth is simply not possible”.
Now the share of investment in Ukraine’s GDP fluctuates at the level of 16-17% of GDP, and this is not only about foreign investment, but about all in general ‒ private and public, domestic and foreign. In order for this figure to reach the boundaries defined by Mr Miklos, the country must annually attract about 10 billion dollars from investors. Sources are clear ‒ International financial organizations with which the Ukrainian government cannot chronically find a common language, or private domestic investments, that is, lending, where the government cannot solve problems, or foreign investors’ means ‒ the most acceptable source for today. The foreign direct investment will allow modernizing the industry, developing production, increasing employment, expanding and increasing the export potential of Ukraine, increasing the share of secondary and final processing in it, and having a higher yield.
The factors that foreign investors pay attention to are few, the main ones are the country’s macroeconomic stability and the protection of property rights. Both factors are directly dependent on the actions of the state power. Unfortunately, even the declared macroeconomic stabilization does not attract investors, because one-time stabilization is not so important for them, but stability, predicted for several years, and this is hard to say about Ukraine, since the government has not yet achieved success in managing public debt, could not agree with international partners, did not move to full-fledged mid-term budgeting, did not improve fiscal discipline and still lives “from elections to elections”. Issues of protection of property rights are also not solved for years. Allegedly completed judicial reform did not make the courts impartial, the business still suffers from the arbitrariness of law enforcement and fiscal bodies, non-competitive working conditions, and corruption.
All this scares potential investors, they lose interest in Ukraine, investing in countries with less risk. Therefore, it is important not only to enjoy the fact that our place has become higher in the competitiveness rating but also to analyze why we have improved our result by only six positions. And most importantly, to understand ‒ the economy cannot be restored by the places in the rating, the real sector needs real money and the main task of the state, to help businesses in the search for these investments.
Text by Valentyna Yushchenko