Attracting foreign direct investment remains a key task for Ukraine to accelerate economic growth says Makar Paseniuk, ICU
Favourable financial markets and positive investor perceptions of macroeconomic and political stability provide Ukraine with good opportunities to accelerate economic growth commented Makar Paseniuk, founding partner at ICU.
He added that against the backdrop of the changing international trade landscape, the toolbox of growth stimulation measures and a relatively low base of GDP, the country is able to boost growth, strengthen its competitive position and occupy new market niches. However, Makar Paseniuk stressed that in order to stimulate sustainable growth, the country needs to intensify its efforts to attract foreign direct investment.
The global economy faces uncertain times — world trade is contracting, economic growth is forecast to slow down, and business expectations are worsening, notes Makar Paseniuk. Trade conflicts and Brexit undermine investor sentiment and curbed capital flows. In response to this, leading central banks are cutting interest rates and increasing purchases of debt instruments. “As a result, the volume of securities trading at negative yields have set new records, investors have been in search for yields and have been investing in emerging and frontier markets,” said Makar Paseniuk.
Investors hunting for yield in this negative rate climate have flocked to Ukraine’s local debt market thanks to its relatively high yields, along with its GDP growth potential and reduction of debt to GDP to 56%. As a result, large volumes of cheaper external financing have become available to government and corporate issuers.
But the danger is, says Makar Paseniuk, that in the tug of war between the global economic slowdown (and its impact on commodity prices, on which Ukraine is highly dependent) and monetary easing of central banks, the former may prevail, leading to lower growth rates and adversely affect the inflow and cost of external financing.
“At present, Ukrainian economic growth is driven mainly by consumption. However, consumption alone will not be able to support a sustainable growth for a long time, especially in the face of a slowing global economy. We need qualitative and structural shifts that can attract foreign direct investment. The biggest priority areas for FDI in Ukraine are agriculture, natural gas, transport and infrastructure,” says Makar Paseniuk.
Makar Paseniuk notes that the agricultural sector not only accounts for 10% of GDP and 40% of Ukraine’s export revenues, but also is the basis for further development of the processing industry and services sector. He believes that launching the land market next year could spur capital inflows into the sector and related industries, and boost consumer demand and labour productivity. “This could add 2-4 percentage points to GDP growth in the coming few years,” he says.
Makar Paseniuk considers gas production one of the main issues of national security—even taking into account a 35% YoY decrease in average natural gas prices this year, its import still requires US$2.7-3bn. State-owned companies were not successful in achieving ambitious goals to significantly increase production, while the share of private business remains too small to significantly change the situation. As a result, since 2014 gas production has grown by only 0.5bcm, and large investments in the sector have not come. This means that the decrease in fiscal pressure and deregulation of the industry over the past two to three years is still insufficient to attract large capital.
Makar Paseniuk believes that the development of the transport sector and infrastructure is critical not only for agriculture and energy sector, but also for the services sector, which accounts only for 50% of Ukrainian GDP compared to the world average of 65% and could help reduce the country’s dependence on the global commodity market.
He believes a favourable location would allow Ukraine to further develop transit services and become an important transport hub. But while the state remains an inefficient monopolist in the sector, the sector will stagnate and hinder the development of industries dependent on it. Creating more opportunities for private business to work in the sector, as well as attracting foreign private capital to state-owned companies is still an important issue according to Makar Paseniuk.
To attract FDI to these and other sectors, Ukraine must be perceived as a consistent and predictable counterparty, concludes Makar Paseniuk. It is necessary to strengthen the protection of private property, the rule of law, and continue to introduce transparent and uniform market rules for all market participants.
Ukrainian Financial Forum (UFF) is one of the foremost annual financial events in Ukraine. Initiated by ICU in 2014, the Forum is an open platform for distinguished authorities on international economics to discuss the global macroeconomic trends and domestic market reforms that are shaping Ukraine’s economy.
Experts from leading global financial markets, including China, the USA and the UK, share at the forum exclusive information on the prospects of global economies for the coming years. Representatives of the Ukrainian government and big business discuss the consequences of global financial processes for Ukraine and reform plans in their segments.
ICU is an independent asset management and investment advisory firm specialising in the emerging markets of Central and Eastern Europe. Founded in 2006 by senior investment professionals from ING, ICU is Ukraine’s leading asset manager with over $500m in assets under management. Current strategy of ICU includes significant allocations to venture capital, alternative energy & renewables and distressed debt.
ICU investment team has experience in private equity & venture capital, high yield corporate debt, distressed debt, restructurings and other special situations across a number of emerging markets. Investment decisions are supported by dependable macroeconomic and sectoral analyses from the in-house research team.
ICU aim to provide clients with superior risk-adjusted returns across a number of asset classes. The firm is expanding its reach into key European markets via a combination of organic growth and acquisitions and continues to expand the range of its investment services.
The founders of the ICU are Makar Paseniuk and Konstantin Stetsenko.