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Researches 15 June 2021

The "Roller Coaster" of the Ukrainian Economy

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The "Roller Coaster" of the Ukrainian Economy

What is the state of the Ukrainian economy now and where is it moving? How was the country’s economic landscape changing over the last decade? Which sectors of the economy became a growth engine and which ones are gradually declining? Which industries did banks give the largest amount of loans to and which of them cannot be repaid? The author’s study "Sectoral Economic Trends of the Last Decade" by Roman Kornyliuk, a financial analyst of the YouControl company, covers all these issues.

 

Trends of the Last Decade

 

The YouControl team researched the issue of economic trends in 2010-2019. For a detailed analysis of the growth rates among 42 sectors singled out by analysts the TOP-20 were selected, which generated 95% of the incomes of the entire economy of the country. The conclusions are as follows.

 

TOP industries of the economy by revenue in 2019

 

The leading sectors of the Ukrainian economy by revenue in 2019 became wholesale (30,5%) and retail (8,1%). This happens because the structure of their revenue duplicates the incomes of other sectors of the real sector of the economy: through the resale of the same goods that are already included in the revenue of plants and factories. However trading companies are an important and solvent segment of the customer base and counterparties of companies with a B2B business model. And without them the sectoral structure of Ukraine’s economy would be clearly incomplete.

 

The next positions in the ranking of sectors of Ukraine’s economy by revenue are: electric power industry (7,8%), food industry (6,6%), transport and logistics (5,6%), agriculture (5,6%), metallurgy (4,9%), etc. Such an industrial-agrarian structure of the economy indicates a low share of high-tech production and an insufficient depth of processing of products to maximise value added.

 

It is worth emphasising that the agricultural and metallurgical segments of the Ukrainian economy are simultaneously the largest generators of export earnings to the country. At the same time over the last decade metallurgy in terms of contribution to total revenue dropped from the 3rd to the 7th place, and the role of agriculture, on the contrary, increased: from the 12th to the 6th place. Both sectors proved to be the most dynamic in terms of changes and, we can say, "changed places".

 

"Races" of sectors of the economy by place in generating revenue of Ukraine’s economy

 

Among the reasons for the long-term stagnation of metallurgy there is the gradual loss of competitiveness of products and old post-Soviet sales markets, weak rates of upgrading the means of production, the impact of the decline in world prices for ferrous metals in 2010-2016. However the trend reversed in 2020-21, although the State Statistics Service of Ukraine has not published revenue data for this period yet.

 

Agriculture is on the upgrade due to the rise in world prices for food, large investments of agricultural holdings in technological renewal of business processes and agronomy, as well as a higher level of market competition.

 

The IT sector, despite some growth and a significant real impact on consumer demand and currency inflows from abroad, remains almost invisible to the official statistics and fiscal authorities. Its share in official revenue of the country’s economy equals only 1,7% in early 2020 (the 13th place). At the end of 2010 it was 1,4%. This happens due to the widespread schemes for optimisation of taxation in the sector through individual entrepreneurs and registration in foreign jurisdictions.

 

The Share of Sectors of the Economy in the Overall Structure of Revenue

 

To assess how exactly the share of each of the enlarged sectors of the economy changed in the overall structure of revenue over the last decade, analysts equated them to 100% and followed further multi-year dynamics.

 

The fastest growth indices of shares were showed by such industries as health care (increased from 0,19% to 0,53%, that is in 2,7 times compared to the reference point in 2010), and the shares in total revenue of agriculture (from 2,8% to 5,6%) and tobacco production (from 0,3% to 0,6%) were doubled.

 

The rapid growth of the share of private medicine and tobacco companies in revenue can be partly explained by the low base effect, as the initial positions of these sectors were relatively insignificant in total revenue of all Ukrainian enterprises. At the same time, while after 2017 the role of medicine continued growing even more rapidly, reflecting the global trend of increasing demand for health care, tobacco companies somewhat weakened their positions, that may also be related to the "global fashion" for a healthy lifestyle.

 

The growing role of the agricultural sector became more substantial given the significant initial volume of the "pie share" of total revenue shown by agrarians, although in recent years there has been gradual slight sliding down of the share. The historical maximum of the share of the agricultural sector was recorded in 2015 at the level of 6,8%. At that time agro-exporters remained almost the only ones who managed to survive the devaluation of UAH relatively well, as their incomes were mainly formed in the strengthened foreign currency after the sale of products abroad. The world conjuncture of stock exchange prices for grain and oil remains favourable enough to maintain high profit margins of Ukrainian agricultural holdings.

 

The TOP of growing and declining sectors of Ukraine’s economy

 

Simultaneously with the strengthening of the role of some sectors, there appeared outsiders in the economy by a decline index of a share of revenue. Thus the share of the financial sector at the beginning of 2020 was only 21% of its share in the economy in 2010. This is explained by the consequences of increased transparency of the market, a high level of bankruptcy because of the reinforced supervision and financial monitoring in financial markets, that limited the incomes of financial intermediaries, which in the first decade of the XXIst century consisted largely of scheme-related and fictitious transactions. The second and third places by the decline index of a share of revenue were occupied by the sectors of by-product coke industry (43%) and metallurgy (70%).

 

What Industries Received the Largest Amount of Loans in 2010-2019?

 

Wholesale, retail, electric power, food and agriculture enterprises received the largest amount of loans from Ukrainian banks. This is quite logical, because all these sectors of the economy at the same time lead the ranking by revenue, maintaining positions or showing the dynamics of growth over the past decade.

 

Companies from the field of transport and logistics (№8 by loans, №5 by revenue) and metallurgy (№9 by loans, №7 by revenue) received slightly less than their own places in the ranking in terms of total revenue. Hypothetically, this can be explained by a higher level of shadowing in the transport industry, as well as a high level of non-payment by loans in the metallurgical industry on the part of financial-industrial groups linked with lending banks.

 

TOP industries by loans received from banks

 

The Largest Debtors

 

To reflect the level of non-performing loans, analysts selected the TOP-20 sectors of the economy, to the enterprises of which banks gave 94% of all corporate loans.

 

It turned out that more than 50% of non-performing loans out of all loans received from banks were concentrated in such important sectors for the economy as: mechanical engineering (75%), chemical industry (74%), construction (61%), metallurgy (52%). This can be considered as another proof of the inability of the oligarchic system to ensure sustainable development of the economy. After all, in a competitive market companies with such delays would be sold to more efficient owners, and the problem of their financing would be quickly solved by new capital infusions. Whereas in our oligopolistic market the status quo remains. Oligarchs complain about the lack of affordable lending and do not want to return their old debts to banks.

 

And no matter how hard representatives of the "raw materials" industries of the economy try to explain a steady decline in their productivity by unstable political and economic factors and unfavourable conditions in world markets, the root of the problem still consists in other things. Obsolescence of legislation and lack of institutional incentives for long-term investment strategies is a product of the monopoly influence of financial-industrial groups. They set back the transformation of "raw materials" industries into a highly profitable and competitive field of the economy, with a deep level of value added. Without the demonopolization of "outdated" sectors of the economy the "roller coaster" of prices for raw materials will continue determining the nature of the Ukrainian economy.

 

TOP industries of debtors (unpaid loans)

 

Retailers (83,4%) have an extremely high level of non-performing loans, while wholesalers (34,5%) did not return only a third of loans to banks. The high level of non-repayment of loans in the retail, rent and leasing sectors is only partially explained by the riskiness of this business. Previously companies with these NACE / KVEDs (classifiers of types of economic activity) were quite often included in the chains of related lending schemes, money laundering from state banks and abuses in the field of financial monitoring, as the procedure for their creation and liquidation is much simpler than in other industries.

 

Reliable Borrowers

 

Companies in the "new" highly competitive markets in the field of IT, agriculture, hotel and catering business, trade in motor vehicles or transport, which have developed actually from scratch over the years of independence, show much lower levels of loan arrears. This is explained by the efficiency and market discipline of these companies, as well as by the fact that in the past their owners much less likely than the owners of  the "oligarchic industries" had access to the financial and banking field and to abuses in lending to related parties. The creditworthiness of “market” companies is assessed according to all banking standards and, therefore, only the most reliable borrowers who repay their loans on time are selected.

 

How and why to analyse a market in the YouControl system?

 

Today it is crucial for a business to analyse in detail the sector of the economy in which it operates or where it plans to invest; to regularly analyse related markets, because the economy of the future is mostly located at the intersection of several markets simultaneously. It is likely that those economic niches that did not previously attract special attention will be able to become a good multiplier of success. An effective tool for such analysis and monitoring is the YouControl tool "Market analysis". It provides data on the market situation of all Ukrainian companies, allows users to research, analyse and forecast activities of businesses.

 

Who benefits?

 

- executives of small and medium-sized enterprises to assess the size of a market, to forecast, to find reliable partners;

- lawyers for business analytics, rating by financial indicators, monitoring of counterparties;

- marketing experts to conduct market researches;

- banking specialists to check the status of customers;

- employees of state enterprises to search for suppliers and sales markets, to analyse the efficiency of work;

- everyone who is interested in new business relations and conscious search for mutually beneficial cooperation.

 

 

How does it work?

 

After logging into the YouControl system, go to the section "Market analysis". The tool allows you to search for companies by field of activity, with certain NACE / KVEDs (classifiers of types of economic activity) and revenue. And filters make the search targeted: the whole of Ukraine or specific regions, the number of employees, separately the volume of exports/imports.

 

 

In addition, it is possible to immediately forecast risk factors: the status of a company, being subject to sanctions, participation in lawsuits, etc. The tool allows you to constantly "keep your finger on the pulse" and to quickly react to new data, that is certainly a significant competitive advantage.

 

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