Economic overview

The retail property market in Ukraine is tightly linked to general economic dynamics in the country and worldwide.

Looking back

Ukraine’s economy has grown rapidly since 2000. From 2005 economic growth in the country was driven by strengthening domestic demand supported by credit boom and significant capital inflows. Though by mid-2008 the economy in Ukraine was overheating with consumer price inflation at around 30% (to corresponding month in the previous year) and high exposure of banks to foreign funding, in the first three quarters of 2008 it showed remarkable resilience to the global credit squeeze, mainly as a result of strong domestic demand.

Since early October 2008, deteriorating conditions on the international financial markets with resultant slowdown in capital inflows in Ukraine combined with political instability in the country, surging inflation, weakening of the hryvnya against the US dollar on the background of the dollarised economy and high imports, increasing interest rates, falling export prices for steel and poorly diversified Ukrainian economy with overreliance on exports of raw materials and metallurgical sector, resulted in a reduction in private consumption in the country.

In late 2008, the Ukrainian economy was plunged into a deep downturn with the first signs of stabilisation only witnessed in autumn 2009, caused by seasonal dynamics. The economy of Ukraine was hit hard by the global financial turmoil. The decrease in real GDP at 14.8% in 2009 was the deepest since 1996, when the national currency hryvnya was launched. The Ukrainian economy demonstrated clear signs of recovery in 2010 with economic growth in the country registered at 4.2%. In 2010, international and domestic confidence in the country gradually improved. Among the main reasons for this were the obtaining of a new ‘Stand- By Arrangement’ from the International Monetary Fund (IMF) and completion of the Presidential elections. The first three quarters of 2011 were marked by Ukraine’s preparation for the EURO 2012 Football Championship and generally positive economic dynamics in the country. Nevertheless, the international ratings of Ukraine worsened owing to the country’s failure to comply with the requirements of the International Monetary Fund (IMF), as well as political risks accentuated by legal proceedings against former Prime Minister Yulia Tymoshenko.

Economic growth
According to the State Statistics Committee of Ukraine, real GDP increased by 6.6% year-on-year in the third quarter of 2011 compared to the economic growth of 5.3% and 3.8% in the first and the second quarters of the year respectively, and 4.2% in 2010. Economic growth was mainly driven by growth in industrial production, particularly its export-oriented industries, as well as retail sector and agriculture. As stipulated in the 2011 State Budget of Ukraine, an
increase in real GDP is forecast for 2011 at 4.5%. Oxford Economics projects economic growth in Ukraine at 4.8%
year-on-year in 2011. According to the draft 2012 State Budget of Ukraine, an increase in real GDP is forecast at 5%, while Oxford Economics project the 5.9% economic growth for 2012.

Inflation
In September 2011 consumer price inflation reached 4.2% compared to December 2010. In January-September 2011 consumer prices grew by 9% year-on-year with the significant price escalation registered for food products and soft drinks, as well as housing and utility services, which together account for over 60% of total household expenditures in Ukraine.
The 2011 State Budget of Ukraine was based on the projection that consumer price inflation will reach 8.9% at the end of the year. Major Ukrainian and international experts forecast year-end inflation in the range of 8.4-13% compared to the actual 9.1% in 2010 and 12.3% in 2009. According to Oxford Economics, inflation in Ukraine will amount to 8.8% in 2012 and 6.7% in 2013, and is projected to be around 5.5% every year during the period from 2014 to 2020.

National currency
In accordance with the official US Dollar exchange ratem determined by the National Bank of Ukraine, the Ukrainian Hryvnia depreciated insignificantly, from 7.959 UAH/US$ in early January 2011 to 7.9727 UAH/US$ in late September 2011. The Ukrainian currency also weakened against the Euro from 10.573 UAH/EUR in January 2011 to 11.216 UAH/EUR in March 2011, but strengthened by late September 2011 to 10.8548 UAH/EUR.
According to the decree issued by the National Bank of Ukraine, from 23 September 2011 the new rules of foreign currency exchange by individuals in Ukraine were introduced to accommodate the requirement to present identity documents prior to each currency exchange transaction, while the limitation to exchange maximum UAH 150,000 per day (instead of UAH 80,000) was set.
Foreign trade and foreign direct investment According to the State Statistics Committee of Ukraine,
exports and imports of goods in Ukraine increased during the period January-July 2011 by 40% and 46.7% year-onyear respectively. The exports to imports ratio during the period was around 0.85. The National Bank of Ukraine reported that net inflow of foreign direct investment (FDI) into Ukraine amounted to around $4,520 million in January-August 2011, almost 49% higher the figure registered during the same period in 2010. The most attractive sectors for foreign investment into Ukraine are the financial sector, industrial production, real estate, retail sector, construction, transportation and communication.

International cooperation
In 2008, Ukraine joined World Trade Organisation. Since May 2008 Ukraine has been in negotiations with the EU for a free trade agreement as part of a future Association Agreement. The 18th round of negotiations between the parties started in September 2011.
EURO 2012
In late 2009, the UEFA Executive Committee confirmed Donetsk, Lviv and Kharkiv as host cities for group matches of UEFA EURO 2012, while Kyiv was appointed the venue of the final match of the tournament. Despite existing obstacles such as the after-effects of the financial crisis, high borrowing costs and imperfect legislation, Ukraine has been undertaking a wide spectrum of preparation works for the event. These include construction of new stadiums, and upgrade and extension of the airports in the host cities, improvement of the motorways of international importance across Ukraine, as well as enhancement of hospitality sector development in the country.
Unemployment
In accordance with the ILO methodology (that defines unemployment based on the population 15-70 years of age), unemployment rate in Ukraine amounted to 8.2% in January-June 2011 compared to 8.1% in 2010, 8.8% in 2009 and 6.4% in 2008. Oxford Economics projects unemployment in Ukraine to decrease gradually from 7.8% at the end of 2011 to 6.4% in 2020.
The unemployment rate varied significantly throughout Ukraine: from 11.5% in Rivne oblast to 5.9% in Kyiv City.

Demographic situation
Ukraine comprises 24 administrative regions (oblasts) and the Autonomous Republic of Crimea. Total population of Ukraine amounts to over 45.5 million inhabitants, making it the 28th largest country worldwide. Over 68% of total Ukrainian population reside in cities and towns, while remaining 32% – in rural settlements. Females account for around 54% in total population in the country. Out of 25 major regional centres, there are 5 cities with official population of around or over 1 million (Kyiv, Kharkiv, Dnipropetrovsk, Donetsk and Odessa), as well as 2 cities with populations over 700,000 inhabitants (Zaporizhzhya and Lviv). In addition, there are 4 cities with population of around or over 500,000 inhabitants (Kryvyi Rih, Mariupol, Mykolayiv and Luhansk), while the population in 22 cities exceeds 200,000 inhabitants.

Household income and spending
According to the State Statistics Committee of Ukraine, the average nominal monthly salary in Ukraine in January-September 2011 was UAH 2,571 (equivalent to US$322) increasing by 18.2% year-on-year. During the period, real salaries grew by 8% year-on-year. It is worth noting however, that the analysis of household income in Ukraine solely on the basis of the official salary statistics may be misleading because of a considerable unregistered ‘grey’ salary segment across the country. The customised research of the Ukrainian cities with population over 100 thousand inhabitants conducted by the international sociological company GfK in 2004-2008 revealed that the estimated average income per capita was the highest in the cities with total population around 1 million inhabitants (i.e. Odessa, Kyiv, Kharkiv, Donetsk and Dnipropetrovsk), which are classified as ‘big and wealthy’.
Consumer sentiment
GfK Ukraine reported that in 2011 consumer sentiment index in the country is generally lower compared to 2010. Due to uncertain future economic conditions in Ukraine and worldwide, consumers tend to be more rational and cautious in terms of their shopping habits and preferences.
Retail sales
Retail sales in Ukraine grew by 15.2% year-on-year in January-September 2011 compared to the 5.1% annual increase in 2010 and the 16.2% annual decrease in 2009. Earlier, retail sales in Ukraine were steadily increasing, reaching 24.4% in 2006 and 28.2% in 2007. In January-September 2011, the growth dynamics of retail sales was registered across all the regions in Ukraine.
Outlook
In the first three quarters of 2011, the Ukraine economy demonstrated generally positive dynamics. The areas of concern include public debt augmentation, high unemployment and inflation combined with high risks of external shocks and political instability in Ukraine. According to the 2010-2011 Global Competitiveness Report, competitive strengths of the country include a well-educated population, flexible and efficient labour markets and a large market size, which set a strong base for the country’s future growth.

The free trade agreement between the EU and Ukraine is expected to be signed in 2011 and implemented in 2013. However, the position of Ukraine in negotiations with the EU has been threatened by legal proceedings against former Prime Minister Yulia Tymoshenko and adjudication announced in October 2011. Institutional reforms and the improvement of inefficient markets for goods and services are recognised as being the priority tasks for Ukraine to secure long-term economic development in the country.