A new epicenter of the crisis

06. January, 2009

What's happening in Ukraine now offers some interesting parallels to what could have happened in Latvia.

Here is a link to a fascinating piece by Edward Hughes, some of which is reproduced here. What has happened in Ukraine is quite similar to what we have seen in Latvia. Ukrainian banks also massively borrowed abroad to lend locally. More than half of outstanding loans are denominated in foreign currency (U.S. dollars). This was also accompanied by rapid growth in wages (and prices). All this recently came to an end. In Ukraine’s case, the catalyst was falling world price of steel, which accounts for 40% of its exports. Industrial output shrank by a stunning 28.6% in November (year on year). World bank forecasts GDP to fall by 4 percent in 2009 (just like in Latvia). Ukraine also applied for help to the IMF.

There are two big differences compared to Latvia. First, Ukrainian hryvnia was repeatedly devalued. In July U.S. dollar could buy 4.6 hryvnias, now – about 7.5 hryvnias. Experts predict that about 40% of the borrowers will not be able to pay their loans. The second big difference is in the quality of governance. Whatever we say about our government, it’s an exemplar of efficiency compared to the Ukrainian one. Latvian government can make decisions! In Ukraine, President Yushchenko appears to be trying to devalue to hryvnia, while his prime minister (Yulia Timoshenko) is trying to place the governor of the central bank under arrest for doing this (devaluation). In some other time, it would have been funny.

However, this all does not bode very well for us either. Think about it: (i) the British pound has depreciated by some 18% vis-a-vis Latvian lat since August 2008; (ii) Hryvnia was devalued; (iii) Belarus New Year present was to devalue by 20%; and (iv) it seems that Russia may devalue if the oil prices will stay low. These countries accounted for 6.9, 1.5, 2.3, and 9.6 percent of total Latvian exports in 2007. Naturally, devaluation by other countries undermines Latvian exports to these countries as the prices of our goods in these countries become higher. Thus, about 10.7% of our exports are already subject to adverse effects due to devaluations by Great Britain, Ukraine, and Belarus. If Russia devalues, we’re talking about a stunning 20.3%, a fifth (!), of our exports. Seems like we are going to have another 1998 on top of our existing problems.

In Latvian here raksts

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