Allow interest

But the weakening Eurozone environment has taken its toll, with industrial production growth slowing sharply in recent months, prompting many economists to cut their forecasts for this year. Russia, Ukraine’s other big market, is showing some signs of slowing too.
“We have found that Ukraine is very responsive both to developments in Russia and in the Eurozone. If Eurozone gross domestic product goes down by one per cent, for example, Ukraine’s goes down by two per cent,” says Alexander Pivovarsky, economist at the European Bank for Reconstruction and Development.
The EBRD is expected to cut its current 2.5 per cent growth forecast for Ukraine this autumn.
Other factors are contributing to the slowdown, including a worse agricultural harvest than last year and the end of a government-financed construction boom in preparation for hosting the Euro 2012 football championship.
Iryna Piontkivska, an economist at Troika Dialog, an investment bank in Kiev, says Troika has already trimmed its 2012 forecast to 1.5 per cent and may cut it further. She adds that growth is being held back by an unfavourable policy mix.
In common with many economists Piontkivska cites an exchange rate policy that aims to keep the hryvnia stable against the dollar, despite pressure on the currency. That has led to very high interest rates and largely choked off credit growth this year.
The policy also means that since much trade is with the Eurozone and Russia, if the dollar strengthens the euro and the rouble weakens, it could make Ukraine’s exports less competitive.
Allowing the currency to depreciate in the run-up to next month’s parliamentary elections would be politically sensitive. However, many economists believe that, once the election is past, the central bank will allow some devaluation and move to a more flexible rate, possibly a gradually widening “corridor” against a basket of currencies.
That could allow interest rates to fall and stimulate credit growth, helping fuel a growth rebound next year – provided the external environment does not deteriorate still further.

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