Alexei Kredisov: "The most optimistic projection is that the crisis will reach its lowest point in February or March of the next year."
RosBusinessConsulting, 7 November 2008
Alexei Kredisov, Managing Partner of Ernst & Young Ukraine
The current financial crisis has so far not evolved in accordance with experts' and market participants' projections. Virtually all parties — companies, households and the governments — have already experienced its impact. Alexei Kredisov, Managing Partner of Ernst & Young Ukraine, shares his views about the probable course of events.
Q: When should one expect the lowest point in the current financial crisis?
A: I am sure that no one can answer this question now. One can only make projections with different probabilities of what kind of scenario the crisis will follow. There are three major scenarios. The first is the worst. Various experts and businessmen assess its probability at 10-20%. In this scenario, the global economy is falling into a deep depression whereby global financial systems will go bust and banks will be nationalized… It is virtually impossible to make projections because the world has never gone through such a crisis. On the opposite end, the second scenario is the most optimistic. It projects a slight recession of the global financial and economic systems. Experts estimate its probability at 10-20%. In this context one should expect that the crisis will reach its lowest point early next year, possibly in February or March. After staying at the lowest point for some time, the economy may resume its standard growth rate by the end of 2009 or the beginning of 2010. The third scenario has the highest probability, estimated at 60-80%. It projects that the economy will recede gradually but over an extended period – it will reach the lowest point in the second half of next year or the first half of 2010. Then it will stay at the lowest point for a year or a year and a half after which it will gradually resume growth. Such are the three scenarios.
Q: Which industries will be affected most strongly by the crisis?
A: Currently, the highest losses have been registered in the financial sector, real estate and metallurgy. There is a saying that when the US sneezes the rest of the world catches pneumonia. There is a moderate reduction in the demand for metal on the global market, by 10-12% on average. In Ukraine the demand for metal fell by 30% in recent weeks – a very big fall – because this country strongly depends on foreign markets. These are the industries that have been affected most. At the same time, reduction of the consumer demand has already been registered in Ukraine. It is likely that a reduction of business activities is in store for us and, consequently, there will be job cuts. This will also result in a reduction of the consumer demand which, in its turn, will affect the investment demand. Eventually all industries will be impacted. The consumer goods industry manufactures goods which are essential for daily life and will be affected to a lesser degree. Consumers need such goods irrespective of whether there is an economic crisis or not.
Q: As regards the effects of crisis on the financial sector, do you think that certain domestic banks are facing bankruptcy?
A: Much will depend on the system's regulator – the National Bank of Ukraine. And, naturally, on actions taken by the Ukrainian government. On the whole, the Ukrainian financial system is relatively healthy. It did not have time to borrow too much and to issue too many problem loans. Therefore, if policies are right the financial system can avoid major shake-ups such as bankruptcies. Chances are that there will divestitures of banks and financial companies and they may take place earlier than originally planned. It is likely that prices will be lower than they could have been under different conditions. In my view, if the National Bank and the government follow the right course the financial system will avoid cataclysms.
Q: Judging by recent developments, the measures taken by central banks and government are hardly effective – the market has continued its slide. In your view, what measures should the regulator and the government take during the crisis?
A: First, I wouldn't say that the actions taken by governments have little impact on the situation. Neither of us knows what would have happened without the anti-crisis measures. I think that the situation would have been much worse. This is the first point. As regards the advice, I would rather avoid giving any – the advice should be detailed and deal with the macroeconomic issues: ideally, one should sit down and write ten pages; just a few words will not be enough. However, I can express my wish that political opposition should be stopped – efforts should be taken to consolidate and resolve topical problems, particularly economic ones. Politicians should act in a responsible manner. It is essential for them to come together, for example, as in the US. Despite the fact that the two major parties are in opposition to each other on most issues, they voted for adoption of the Paulson Plan, a rather unpopular act. Therefore, without going into further detail I hope that our politicians and lawmakers unite at this difficult time.
Q: To what degree do politics impact the situation? Can one say that the current political instability has deepened the economic crisis?
A: There is no doubt that the political crisis deepens the economic crisis. If its impact is not so high currently – it's only because Ukrainian business has become accustomed to operating under the conditions of a political crisis. We are in an extremely unfavorable position from the viewpoint of the political system, continuous elections and the lack of unity between our political leaders. However, business has already developed immunity to politics and political risks. Nevertheless, the continuation of the political crisis worsens the current negative economic background. At such a time the country, the business community and the people urgently need harmony and mutual understanding between politicians. Not earlier, when the Ukrainian GDP was growing by 7, 8, or 10%, but now that we are on the verge of a major financial crisis.
Q: How deeply has the Ukrainian market been affected by the reduction of its ratings by the rating agencies?
A: In general, the impact is significant, very significant. Chances are that in the current conditions whereby capital markets are virtually closed for Ukraine and Ukrainian companies, the impact will not be particularly strong. However, taken at large, any downturn in ratings is highly negative both for the country in general as well as for individual companies. One may disagree with the opinion of rating agencies if one wishes, but markets will pay attention to their opinion for a long time to come.
Q: What actions would you recommend that companies take during the crisis?
A: There is an English expression – it depends. It depends on numerous factors. How strong the impact of the crisis is, which financial sources have been closed, etc. I shall put it plainly. Let us assume that you have a permanent income source, e.g. your grandmother living abroad sends you a monthly allowance. You have become accustomed to comfortable living: you own an apartment in downtown Kyiv, frequent restaurants and follow a certain lifestyle. What would you do if it all ends at some point? Let us say that your grandmother has passed away because of old age – there are no more cash transfers. What would you do? Evidently, you should change your lifestyle and move from downtown to the outskirts. It is likely that you should reduce consumption, take your vacations somewhere in Ukraine and not abroad and, possibly, not even leave Kyiv. Therefore, there should be a reduction of social expenditures for the whole country irrespective of how painful that may be. But these are the actions that you will be taking if you find yourself in a similar situation.
Q: Should the government, in your view, support business during crisis even through the reduction of social expenditures?
A: At the least, the government should not damage business through its actions. And what is the current situation? An increase of taxes and excises is being actively debated. Mind that this is during a crisis and it is not right. Business needs support. Business is vulnerable particularly now. It cannot pay taxes, cannot hire enough employees and pay them wages. It is not right to kill the hen that lays the golden eggs. This is what we are witnessing now, I am afraid.
Q: What would you advise to a rank-and-file employee and a rank-and-file investor during the crisis?
A: Again, it all depends on circumstances. If you struggle to make ends meet, then during a crisis when your income most probably falls and the inflation rate goes up – that’s one story. One should focus on the essential things and spend money only on them. But if you have accumulated some savings, let's say US$200,000, it may be prudent to invest them into real estate, e.g. buy an apartment or, if at all possible, a viable business. It will probably be prudent to invest the funds – it all depends on circumstances.
Q: Do you think that the time is right for investment? Wouldn't it be prudent to wait for the market to slide further?
A: That is speculation. Difficult to say. Evidently, one can make a projection based on certain macro- and microeconomic indicators as well as the attitudes of different companies and entrepreneurs. However, in my view, it is premature to make such a projection. Currently all parties are trying to understand what is going on – how quickly we are going down and in what spheres.
Q: In your view, will domestic companies have access to foreign capital markets during the crisis? Such companies as Metinvest and Interpipe (steel pipe and railway wheel producer) have had IPO plans…
A: It is likely that currently we are going through the most active phase of the crisis and it is not fully clear how long it will last. Everybody is panicking and no one will have access to capital markets now. However, if the recession of the global economy continues for two or three years I cannot rule out that reliable borrowers, like Metinvest for example, may have access to foreign capital markets during the crisis. The volume of money in the global financial system has not changed – what has changed is the volume of quasi-money: derivatives, swaps, etc. The volume of money which includes the gold and foreign exchange reserves held by banks has remained the same. Investors would like to invest it at some point. They will take it to banks and stock exchanges so that the money can work and bring income. Reliable borrowers will be eligible to receive such funds. Therefore, the capital markets are closed but they are closed temporarily. Everybody is going down and is trying to figure out what's going on. However, after they understand what has happened and how low we have fallen, which parties have been more affected and which less – then, I am sure, capital markets, both debt and equity, will be restarted.
Interviewed by Volodymyr Drabchuk
