Oleg Ustenko on Growth & Economics

The Black Sea emerging market countries are highly dependable on their external environment. This dependency goes through both goods’ and financial markets. With a shaky situation on international goods’ markets and their prolonged recovery it’s very likely that all countries of the region will depress possibility of their economic growth (at least in a short-run). Countries with a higher dependency from export will be affected more compared with those where economies are more oriented on internal consumption. Georgia, Ukraine (and in many sense Russia), where share of exports in the countries GDP are quite substantial and exceed 50% might experience greater shocks than others. Moreover, low level of diversification and concentration on a very limited number of goods do this dependency from international markets even higher. And, still it’s not the end of the story. CIS countries of the Black Sea region are traditionally exporting products with a low value added component. Unfortunately, this is exactly the group of goods prices of which are highly volatile. Any negative changes in external environment tend to be first reflected in this particular group of products. Taking into account that more than a half of Ukrainian export is precisely in this group one should expect that this country had an extremely negative effect from any worsening in external conditions. Such worsening is already translated into declining GDP, which shrunk at about 1 ½ % since the beginning of the year. The common expectation is that current weak revival on international market will serve as a compensatory channel for all Black Sea region countries including Ukraine. However, it raises deeper economic policy issue. Export-led growth is already exhausted. This is even more important for countries such as Ukraine and Georgia.

Consumer led recovery for the Black Sea region looks shaky. The main concern here is a weak public finance. It is very unlikely that any of the country will be able to repeat the “credit boom story of 2006-2008” (i.e., see graph below).

The End of the Credit Boom (credit to private sector, % annual change)

Source: IMF, World Bank

These simple arguments drive us to the conclusion that without real changes in investment/business climate the situation in the Black Sea region might remain shaky. In a difference to Bulgaria and Romania – who are backed by EU – neither Ukraine no Georgia/Russia/Turkey could dream of such support. These countries would survive only in case they are able to offer to potential investor competitive business environment. In the latest Doing Business Report Ukraine was already named as one of the top reformer. It might be a reason to open champagne. However, it’s not. A lot of work is still ahead.


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