BRDO’s analysis: the impact of the economic crisis on key areas and markets

23-03-2020

Better Regulation Delivery Office analyzes the main areas and markets of the Ukrainian economy, so we have grouped the impact assessments of the emerging crisis by sector.

IT

Due to the specificity of IT, the crisis will less likely to affect this market. The growth of the sector is likely to slow as entrepreneurs put the scaling-up of projects on hold and the quality of IT projects may be affected. But in general, in response to the quarantine and the crisis, many businesses will need new solutions, so they will need the services provided by IT specialists as well.

Telecom
  • The main market revenues will remain the same, as consumers will not stop using telecommunication services. However, a part of the profits will be a bit lower due to the reduced use of roaming services and the closure of stores.
  • The devaluation will increase the cost of network deployment, including 4G in the 900 range in each settlement with a population of more than 2000 people, as well as on international and national highways. It is likely that such a rise in price will affect the cost of the product offered to consumers in the coming years. The fact that some population groups can’t work due to illness or quarantine as well as potential problems with the supply chain of Chinese equipment may delay the network deployment, although it is too early to comment this.
Agriculture
  • The demand for food items is high, but farmers are ready for the sowing season, so the crisis will affect the agricultural sector less.
  • Ukrainian agricultural products will be in high demand in foreign markets. In this case, it is important to monitor the availability of products and stock up for Ukrainian consumers.
Infrastructure
  • Due to reduced demand and production, all transport modes lose volumes of transportation and, as a consequence, revenues.
  • Road haulage companies have the opportunity to suspend their activity because they have relatively small regular salaries, and this will allow them to survive the crisis and not incur critical losses. But the emigration of drivers who will move to work in the EU (Poland) in the event of reduced income (not even dismissal) will be a problem.
  • According to careful estimates, losses due to the reduction in railway freight traffic will amount to about UAH 10 billion a year (approximately 10% of Ukrzaliznytsia’s annual income). Given the hryvnia devaluation, this is a 20-25% decline in revenues in the currency equivalent. It should be remembered that fuel and new locomotives are purchased for dollars, and this calls into question the possibility to purchase and repair railways lines and equipment. Passenger transportation was unprofitable even before the crisis, so the reduction of its volumes will not affect the company’s profits.
  • A ban on flights will have a negative impact on airline profitability. Low-cost airline companies will be affected the most. But this is a global problem, and it is unlikely that Ukraine will be able to change this situation only on its part.
  • The taxi market will drop a bit due to the quarantine, but the overall demand for services will fall much less than for other modes of transport.
  • As it was after the 2008-2009 crisis, there will be a reformatting of the world market, which will change the direction of export flows and cause a “break” in the operation of ports. We can safely talk about the drop in transshipment by 15-20% and the revision of maritime lines.
Energy
  • The negative effects on the market are related not so much to the pandemic as to the financial crisis and, as a consequence, the decline in economic activity in the country.
  • The decline in electricity consumption (and therefore in its production) that began as a result of the warm winter will accelerate and, consequently, a further fall in electricity prices may occur.
  • Given the decline in electricity production by traditional producers, first of all, by NPPs and TPPs, as well as the seasonal increase in renewable energy production, the share of electricity produced with green tariffs will increase, but this poses two risks. The first risk is the technological one, that is, the complexity of power system dispatching, and the second risk is the increase of the electricity price for consumers.
  • Considering the increase in the share of unprofitable enterprises, as well as the fall in personal incomes, the consumer debt for electricity will increase, and this will also affect producers.
  • The fall in oil and natural gas prices is a positive factor in the medium term. Such a decline will lead to a fall in motor fuel prices (adjusted for the change in the dollar exchange rate) by June, but a slight, rather psychological decline can be observed even today. Reduced natural gas prices will lead to a decrease in the cost of production, in which its share is significant (mineral fertilizers, thermal energy).
Construction

Devaluation of hryvnia will stimulate the inflow of investors’ money into housing construction. At the same time, business investments in development will be significantly reduced, which will reduce the volumes of construction of non-residential premises.

Metallurgy industry
  • The price of metallurgical products is closely correlated with the oil price. The main markets for Ukrainian rolled metal products and semi-finished products are the oil producing countries that have faced with the crisis. As oil prices fall, prices for rolled metal products also fall.
  • The level of iron ore prices is directly dependent on exports to China, which will be reduced due to the pandemic and crisis.
  • Accordingly, the sector will drop significantly.
  • Today, there is a fall in volumes of cast iron, steel and rolled metal In 2019, Ukraine produced the lowest amount of cast iron, steel and rolled metal in all years of independence. In contrast, the ore extraction and export increases. This is a fact and a sign of the Ukrainian crisis.
Labor market

All enterprises, without exception, that suffer at least from the introduction of quarantine and, at the worst, from the economic crisis (starting with bars, restaurants, cinemas, entertainment facilities, tour operators and ending with freight transportation, energy and metallurgy) will face with a problem to pay staff salaries.

Businesses will be faced with the choice of sending staff on unpaid leave or dismissing people who will queue to register at the job center in the midst of the epidemic.

In this case, a mechanism, under which employers will be entitled to send workers in quarantine (self-isolation) while simultaneously submitting online documents to the State Employment Service to assign the unemployment assistance from the State Social Security Fund of Ukraine due to the quarantine (self-isolation) can be introduced. However, such companies should be exempted from the obligation to pay salaries to employees who receive such type of assistance.

This will allow businesses that will have to suspend their activity due to the pandemic to retain their employees, who will be guaranteed to receive payments from the state during this business interruption.

Read more about the position of BRDO and other experts in the Focus news magazine (Ukr).

 


BRDO is an independent regulatory policy advising institution in Ukraine, funded by the European Union under the FORBIZ project and within the framework of EU4Business Initiative.

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