The Fifth Forum “Capital Market of Ukraine” took place in Kiev.
CAPITAL MARKET OF UKRAINE: ON THE WAY TO SUCCESS
The Fifth Forum "Capital Market of Ukraine" took place in Kiev.
The title of the article was the slogan of the Fifth Annual Forum "Capital Market in Ukraine", which took place on 14-16 June in the Ukrainian House in Kiev.
A specialized exhibition, conference, seminars, round table and presentations were held within the framework of the forum, which was organized by the Ukrainian Society of Financial Analysts and Financial Analitic-Service company.
Such forums traditionally are significant events in Ukraine and attract attention of many representatives of the investment business and Ukrainian and international industrial sector. Leaders of the country, famous financiers, exchange and stock dealers, experts in investments and taxation, and entrepreneurs usually participate in these forums.
The present forum demonstrated that, notwithstanding the long economic depression, capital market in Ukraine did not lose its potential and has now started to recover. This may lead to revival of the whole Ukrainian economy.
The data reflecting the situation and tendencies of the Ukrainian capital market’s development were unveiled at the Forum.
The market for bank services
According to the data with the Association of Ukrainian Banks, at present, 203 credit-financial establishments have been registered in Ukraine, 38 of them being in the state of liquidation, financial reanimation or re-organization.
As of the beginning of the current year, 199 commercial banks were registered in Ukraine. In the two recent years, 30 banks with foreign investments were registered, including 9 with 100% foreign capital. Stanislav Arzhevitin, Chairman of the Association, said that Ukrainian banks founded with involvement of foreign capital account for some 30% of bank services.
Today, 161 banks with total authorized fund worth over UAH 3.211 bln. operate in Ukraine. The largest ones are the following: Prominvestbank, Ukrsotsbank, Sberbank Ukrainy (Savings Bank of Ukraine), Ukreximbank, which have a state’s share in their authorized funds, as well as banks Ukraina, Privatbank and Aval. On average, the authorized fund per 1 operating bank is about UAH 19.9 mln. Aggregate capital of the Ukrainian banking system accounted for UAH 5.88 bln., as of January 1, 2000, which was equal to approximately USD 1 bln. According to the data with the Association, aggregate revenues of Ukrainian commercial banks in 1999 totaled UAH 513 mln. (USD 98.6 mln.). 15 commercial banks were unprofitable in 1999.
Stock market
Securities are an important instrument of attracting funds in the economy. According to the State Commission for Securities and Stock Market, 35,260 joint stock companies operate in Ukraine at the moment. As of January 1, 2000, the total volume of share emissions registered by the State Commission for Securities and Stock Market amounted to UAH 31.682 bln.
It should be noted that the portion of attracted funds in the share emissions in 1999 accounted for some 20% of the total volume of share emissions. The insignificant volume of issued shares aimed at attracting investments could be explained by the present investment environment in the country, which predertemines a high level of risk for this kind of securities, incompleteness of the privatization processes in many joint stock companies that prevents these companies from issuing additional shares, and unwillingness of the new owners of privatized enterprises to use this particular investment instrument, because they are afraid to lose control over the enterprise.
Bonds are barely used on the stock market (in 1999, only 2 issues of corporate bonds and 2 issues local government bonds were registered). The main reason for that lies in high credit rates on the financial market.
Depositary system has already taken shape and is now functioning in Ukraine. Register holders, security holders and the clearing depositary are its participants. As of January 1, 2000, according to the State Commission for Securities and Stock Market, the following entities were acting in Ukraine: the National depositary of securities, the clearing depositary of securities, 75 security holders, 357 registrars, and 1,539 emitents that are keeping registers of the owners of registered securities independently. OJSC Inter-regional Stock Union, which has 70 client-holders, has introducted a scheme of settlements under agreements on securities in the depositary system according to the priciple "supply against payment".
Investments
At the moment, funds owned by enterprises and organizations are still the main source of investments in Ukraine – UAH 10,363.5 mln. (or 70% of the total volume of investments).
There is a tendency to a growth of investments in the fixed assets. In the first quater of 2000, investments in the fixed assets increased by 26.2% compared to the first quater of 1999, while in January-April – by 38.8%. Foreign investments over this period totaled UAH 3.4 bln.
The population’s investments in the Ukrainian economy are insignificant. They are mainly made in construction of accomodation facilities. There also could be noted a positive tendency to a growth of the population’s deposits on deposit bank accounts (including the Savings Bank), which increased by 18% in January-March 2000 and amounted to UAH 5.1 bln., including those in national currency – by 19%. Since the beginning of the year, the actual growth of deposits in national currency, taking into account the level of inflation, made up 8%, and in foreign currency, taking into account devaluation of the UAH against the USD, – 12%. In January-March 2000, the population’s deposits in hard currency added USD 50 mln. (in 1999 – USD 36 mln.)
The portion of the credits aimed at investment activity of business entities is gowing down (as of the end of February 2000, it was at 8.3%, which was 0.6% down compared to the figure registered at the beginning of the year).
Foreign investments are an important source of financial resources for the economy under shortage of internal funds. However, the total amount of direct foreign investments in Ukraine, according to the data with the State Statistics Committee, amounted to only USD 3,374.9 mln. as of April 01, 2000. Net growth of foreign investments in the first quater of 2000 upsurged eightfold, as compared to the respective period of 1999. 7,300 enterprises received investments, USD 465,200 per one enterprise. Among Ukrainian enterprises, the following ones received the most considerable foreign investments: OJSC Rosava – USD 23,9 mln., Cargill – USD 19.3 mln., McDonald’s Ukraine Ltd – USD 8.1 mln., and Coca-Cola Amatil Ukraine – USD 1.8 mln. Attraction, efficient use and increased volumes of foreign investments are aimed at achievement of the up-to-date technical level of production on the basis of new resource-saving, science-intensive and environment-friendly technologies, enlargement of export volumes, overcoming of dependence on imports, launching of production facilities with utilization of local resources, and development of the private sector.
From the speeches
of the Forum’s participants
Alexander BONDAR, Chairman of the State Property Fund of Ukraine
Privatization process in Ukraine cannot be turned back
On June 14, 2000, the President of Ukraine signed the State Privatization Program for the years 2000-2002. This is a very important political step, since this is the most radical program for attraction of investments (first of all, of foreign investments) in the history of the Ukrainian privatization. Now, we have a unique opportunity to show the whole world that Ukraine is progressing within the approved frames, that we are approaching transparent sales standards, offer controlling interests in enterprises promising for investors and try to attract as much investments in the Ukrainian economy as possible.
By the beginning of 2000, approximately 67,000 entities had changed ownership, small enterprises being the majority of them – about 80% of the total number. Midsize and large enterprises make up the other 20%. The total value of authorized funds and intangibles of the enterprises that have changed the form of ownership account for 32% of the value of the fixed assets and intangibles of all Ukrainian enterprises. After withdrawal of enterprises from the state ownership, 53,500 entities or 80% of the total number of such enterprises became collectively owned, and 13,200 entities or 19.8% of the total number – privately owned. According to the State Statistics Committee, 55% of the total output of industrial products was manufactured by the enterprises with new non-state forms of ownership in 1999. Private enterprises 1.7 times exceed the state ones in terms of production volumes. Some 3,500,000 people are employed by the privatized enterprises, which makes up 24% of the total number of people working in all economic sectors.
Owing to a number of objective and subjective reasons, most enterprises that were withdrawn from the state ownership in 1992-1998 during the period of large-scale privatization, acquired neither efficient owners with market experience, nor investors with suffient funds for further development of enterprises. However, on the whole, the completed privatization opened a new way to true owners for these companies. The aforementioned figures show that the privatization process has gained a "critical mass" and now can not be turned back. Nonetheless, peformance of enterprises that have already been privatized gives grounds to think that privatization in Ukraine has not moved the best way so far. Some conclusions have been made in this context and have found place in the new privatization program. The State Privatization Program for the years 2000-2003, which provides for legislative support of the privatization strategy for the three forthcoming years, was highly evaluated by experts of the International Monetary Fund, the World Bank and by a number of other influential experts. They, together with experts of the State Property Fund of Ukraine and parliamentary committees, participated in its development.
Since the beginning of the year, a lot of preparatory work has been done in order to secure the privatization process in the current year as provided for in the Privatization Program. For the first time in privatization practice, a list of entities subject to privatization in 2000 was published in advance. No entity can be excluded form the list, so that the privatization process be stable. A few dozens of fixed state-owned interests, including those in strategic enterprises, were unblocked by regulations of the Cabinet of Ministers of Ukraine.
As of June 1, 2000, institutions conducting privatization in Ukraine announced 91 auctions for interests of the total nominal value of UAH 596 mln., 3 tenders worth UAH 502 mln., contest selection of advisers for preparation and conduct of open trades for interests in 28 industrial enterprises, including 7 power-generating companies worth the total of UAH 648 mln. Some 12 power-generating companies with the total nominal value of over UAH 215 mln. will be offered for sale till the end of 2000. The total amount transfered to the budget in 2000 as a result of privatization made up UAH 1,34 bln. Nikolaev Alumina Plant accounted for over 50% of this sum.
In the near future, investors will have an opportunity to take part in auctions for enterprises that pose an attraction from the investment point of view, such as Khartsyz Tube Works, OJSC LiNOS, metallurgical works Zaporozhstal and Azovstal, Oriana chemical concern, machine building plants Drogobych Automobile Crane Plant, Luganskteplovoz, Yuzhny Electric Machine Building Plant and many others. Ukraine intends to put up for sale the minimum of a 25% interest in Ukrtelekom company this year, as well as blocking and controlling interests in a number of power-generating companies.
Recently, sales of shares in enterprises on stock exchanges have become more active. Stakes worth 25% of the authorized fund of some liquid entities are offered for sale on exchanges. A 20% interest in Azovstal and a 16% interest in Melitopolgas are scheduled for sale in July 2000. Within the frameworks of the project for improvement of privatization through auction sales of shares to industrial investors with involvement of advisers, there were announced tenders for sale of interests in Crimean Soda Plant, Lutsk Cardboard & Prepared Roofing Paper Plant and Khartsyz Tube Works. The tender on Lutsk Cardboard & Prepared Roofing Paper Plant has already been held. This month is the deadline for submitting of applications for Crimean Soda Plant. We think that the auction for Crimean Soda Plant, notwithstanding all the clashes around its sales, will bring the best results ever registered for this way of privatization among other enterprises. 14 applications for participation in the auction have already been received so far, and the price for the interest offered for sale is increasing significantly.
The situation with Khartsyz Tube Works is a bit different – there is no information available on participants in this auction, as the enterprise is very specific. However, we are going to prolong the term for submitting applications, since it is quite possible that potential investors interested in this enterprise simply have not taken the final decision yet.
To ensure transparency and predictability of privatization process, a plan-schedule for the sales of interests in enterprises was issued. The list includes, among others, enterprises, of strategic importance for the country’s economy and security and that are monopolysts on the markets for corresponding commodities, works and services.
Alexander BAZAROV, Chairman of the Board of Credit Suisse First Boston Bank, Switzerland
Economic problems force us to act
Back in June 1997, we stated that macroeconomic stabilization could not be achieved without speeding-up of structural reforms and privatization. We also proved that 1997 could have become either the year of Ukraine’s confident entering international markets or the year of lost hopes. In 1998, delays in structural reforms and privatization still hampered the process. We said that the government should not have been blamed for everything. The situation on the stock market depends only at approximately 20% on the government. We also noted that privatization did not mean only replenishment of the budget, but also formation of a competitive environment; we spoke of what an ordinary investor wanted, i. e. the one, who was neither a donor, nor a sponsor, but rather an entity investing money to receive profit; and, finally, we spoke about measures, which were necessary to be undertaken by the state authorities, the State Property Fund, the State Commission on Securuties and the Ministry for Finances. These problems are still topical.
In summer 1999, we analyzed monetary performance and indicated that artificial pumping of money in the economy is useless.
I would make the following conclusion, taking into consideration all the events that have taken place over the 5 recent years. Establishment of the stock market in Ukraine and setting of the main market rules, some positive tendencies in the economy, and certain political stabilization can be regarded as positive factors.
However, the main positive factor, although it sounds weird, is that the present situation is so terribly bad that we just have no other choice – we have to act. And we know what should be done.
Some negative factors are as follows: we have not yet reached a common decision on what direction we should take. People are tired of the problems, and, therefore, it is more difficult to conduct reforms than it was 5 or 8 years ago. Structural reforms and privatization are still lagging behind. But, the worst is that we are still looking for the one, who is guilty of all our present problems.
We have to understand the simple truth that nobody will help us, except for ourselves. As long as we do not realize that, we will hold self-sufficient events such as our Forum.
Michael BLEYZER, President of Sigma Ventures Inc.
We have to build the house
for the Ukrainian economy
We have to build a house for the Ukrainian economy on the beautiful fields of Ukraine. People will come to this house and will bring capital, which can ensure long-term economic growth.
Economy can not exist without the capital market. However, the amount of investments in Ukraine’s economy has obviously been insufficient so far. Only USD 3 bln. were invested in it over the ten recent years, whereas USD 8 bln. were invested in the Polish economy in 1999 alone.
The main problems of the Ukrainian economy are as follows:
· Why does the capital flee from the country?
· Why does the Ukrainian government destroy its country with high taxes?
Upon the collapse of the communist economy, Ukraine is trying to turn to the market economy. The country does conduct economic reforms at present, but there are no results.
State property is one of the main problems of the Ukrainian economy today. The statement that everything belongs to the state means that nothing belongs to anybody. State property gives birth to such problems as monopoly, deficit, huge raw-material expenditures, non-competitive products and ecological problems.
Ukraine’s economy tries to put into existence colossal plans. However, the military complex still accounts for a very large portion of the Ukrainian industry, unlike regular consumer goods. Antiquated infrastructure is characteristic for the country’s economy, and much funding is required to change it. In the meantime, Ukrainian enterprises are spending their assets only with the goal of making some money.
The world experience shows that every transitional economy should start its development with importing capital and credits. There is no other way. People are simply borrowing money from their neighbours to stimulate their own economy.
Simplicity, transparancy and predictability are the main conditions for development of the legislative basis of the Ukrainian stock market. Otherwise, investors will leave for another country.
Investors must realize that Ukraine is on the verge of economic changes. So far, they do not feel comfortable in this country.
The main objective of the Ukrainian reforms should be improvement of living conditions in the country, which is characterized by a growth of the population’s incomes and a decrease in unemployment figures. This can be achieved through acceleration of the economic growth and investing in education, health services and programs to support needy people. Funds for these investments can be obtained by the state provided there is a production increase. You need some 5-7% of the annual economic growth…
Vitaliy LISOVENKO, Head of the State Debt Department with the Ministry for Finances of Ukraine
Will we see the return of the golden age of Ukraine’s capital market?
The history of Ukraine’s capital market started in 1995. This market saw its golden times. However, now it is not in its best shape, although we have managed to preserve the market’s main potential.
The key problems faced by the market are as follows: low solvency of securities issued by the Ministry for Finances and high interest rates on money loans. The market does not trust the state so far. Risks connected with providing loans are very high.
Besides that, we are anxious about the short term of loans and short turnover period of the state securities. As a result, our economy may see a revival of the "pyramid" structures.
In 2000, Ukraine’s aggregate foreign debt has amounted to USD 3 bln., whereas currency reserves now account for only USD 1 bln. Many payments had to be made in the first quater of the year. We had two possibilities: announcing default (Russia and Ecuador did it) or transaction of debts.
In 1999, the Ukrainian government conducted negotiations with the major market players. Then, at the beginning of 2000, it prepared a package of offers, which was accepted by 99.24% of the creditors (there were about 100,000 creditors on the whole). We consider that to be the credit of trust to the new government and its reforms. This measure allowed the state to save some USD 1.9 bln. for the budget. Besides, we strictly followed the main principle – all creditors were treated equally. Everything was done transparently.
Despite a number of measures, domestic capital market of Ukraine is not well developed yet. This is the main goal for the Ministry for Finances so far. It is better for the state to borrow inside the country, since then the capital is left in the country. Besides, there are no currency risks in this case.
The Ministry for Finances has developed a concept for development of the domestic capital market. Its main principles are as follows:
· Necessity of the detailed forecast and planning of the state borrowings, analysis of fiscal positions and advisability of issue of any financial instruments;
· Necessity of introduction of the debt instruments with long-term turnover period (the population should have an opportunity to buy and sell bonds whenever they want to);
· Increased number of market participants;
· Establishment of an institute for market support with involvement of Ukrainian banks;
· Transparency of launching of the exchange mechanism between the Ministry for Finances and market operators (via the Internet);
· Bringing the state securities in compliance with the international standards.