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Foreigners Bullish on Yushchenko's Ukraine

January 18, 2005 | Reuters, AP

If investors hadn't heard of Ukraine a few months ago, they have now.

A country of nearly 50 million people, Ukraine has a four-year track record of booming, export-driven economic growth and a fat trade surplus. Last week it announced record gross domestic product growth last year of 12 percent, Europe's best.

But fundamentals aside, two political factors have finally put Ukraine squarely on the map since the middle of last year.

It suddenly acquired a long frontier with the European Union when the bloc expanded in May. And it now has a new pro-Western president after public protests helped overturn an election result in November that had been rigged to favor a pro-Moscow candidate.

Liberal President-elect Viktor Yushchenko, who won a rerun vote last month, campaigned on a platform of transparency, fighting corruption and opening investment opportunities to outsiders. He had a strong record of reform when he served as Central Bank chief and prime minister several years ago.

Bond traders on emerging markets desks abroad have known about Ukraine for some time. Its debt, traded in London and New York, has performed well for several years.

"It had a very strong financing position, current account surplus, rising reserves, good growth, and it had been a regular issuer in the market, which raised the country's profile," said Timothy Ash, head of emerging markets at Bear Stearns in London.

But more investors are now flying in to Kiev and looking at local investments like stocks and domestic bonds.

Tomas Fiala, a Czech who runs Dragon Capital, one of Ukraine's few brokers, said calls from fund managers started flooding in just before Yushchenko's "orange revolution."

"Since September we have had at least one European or U.S. investor around here every week. Some weeks it was at least three investors coming for investment trips," he said.

Not only are more fund managers coming, they are coming from a different direction -- east from over the borders of new EU members like Poland or Hungary, rather than west from Moscow.

"We're getting a lot of calls from Central Europe and a lot of Austrian, German, French and U.K. investors," Fiala said.

"The election ... changes Ukraine's future development from tracking Russia to trying to move into Europe and follow Poland, the Czech Republic, Hungary and Slovakia," Fiala said.

The short-term economic picture is not all rosy.

Inflation picked up sharply because of a pre-election spending binge by the outgoing authorities, who sold off reserves and handed out higher pensions and wages. Price growth hit 12.3 percent last year, the government said this week, a four-year high up from 8.2 percent in 2003.

Ukraine's economy is still dominated by former-Soviet heavy industries, especially steel and chemicals. Those industries have boomed over the past few years driven by strong demand for industrial raw materials in developing Asia. But those markets are cyclical and possibly in for a rough patch.

For most investors the only chance of exposure to Ukraine has been debt issued abroad. The government and private companies both had successful eurobond placements over the past year. Firm demand has brought yields on dollar-denominated sovereign debt as low as around 7.3 percent.

"It's been on the radar screens for a long time from a fixed-income perspective. Equities less so," said Ash.

"Obviously there's a lot of issues about corporate governance. That certainly restricted interest. Going forward, the interest will be more focused on the equity."

Those flocking to Kiev will not yet find much to buy.

Ukraine's stock market was the world's fastest-rising last year, with an index compiled by Dragon Capital surging by 180 percent. But volume is tiny and there are only about 30 traded companies, and only 10 liquid enough to make the index.

Yushchenko has promised to increase privatizations open to foreigners, which should make for a more robust market.

Domestic government debt may also still be a good buy, with double-digit yields denominated in a hryvnia currency that has been stable for years and -- given the large trade surplus -- could appreciate against a falling dollar.

Foreign investors have doubled their holdings in Ukraine's domestic debt in the last six months, the Finance Ministry says. Foreigners bought 80 percent of the paper at an auction last week, the first since the rerun election.

But the best long-term opportunities may be for strategic investors in sectors like brewing, food processing, retail or construction, aimed at the still-stunted domestic market.

Ukraine's economy is now 60 percent exports, with local consumption held back by monthly average incomes of barely $100. If Ukrainians' living standards ever start approaching those of their new EU-member neighbors, there is a lot of room to grow.


By Peter Graff
Reuters

Sergei Chuzavkov / AP

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