The industrial sector of Ukraine: Trends, challenges and policy options - Summary of results

Transcription

1 Policy Briefing Series [PB/10/2015] The industrial sector of Ukraine: Trends, challenges and policy options - Summary of results David Saha Berlin/Kyiv, June 2015

2 Structure 1. Introduction 2. Trends in Ukraine s industry Aggregate development Development of subsectors Regional industrial development 3. Challenges Structural change Export reorientation Effects of the current conflict 4. Policy Options 2

3 1. Introduction 3

4 Industry is going through a challenging time Industrial production figures have substantially declined in past year, particularly due to conflict in East Fear exists that Ukraine is losing its industrial economic backbone This Paper: analyses trends at subsector and regional level points out challenges for Ukraine s industry outlines policy options to realise the industrial potential of Ukraine 4

5 2. Trends 5

6 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Severe reduction of industrial output in 2014/2015 Dynamics of industrial production Severe decline of industrial production since mid-2014 April 2015: production at 78% of April 2014 level % yoy Clearly effect of conflict in the East But probably more than just conflict-induced disruptions Weakened trade ties with Russia and insecurity of investors will also play a role Source: Ukrstat Key question is what part of these losses are temporary or permanent 6

7 Also a long term process of industrial decline Value added in industry UAH bn % Sharp decline of industrial share on GDP since collapse of Soviet Union In 1990 s, 50% industrial share in part due to form of organisation of conglomerates Process has not yet stopped: Decline by 6% of GDP Other transition economies (e.g. Poland, Hungary, Slovak Republic) have stabilised industry share at 30%. Source: World Bank UAH bn (lhs) % of GDP (rhs) Structural change still incomplete: New growth should replace decayed old industries 7

8 Growth of subsectors indicates gradual structural change Industry subsectors: Sales growth, and share of total industrial sales 100% 80% 60% 40% 20% -40% Sales growth Wood Textiles Furniture, other* Paper, printing Chemical, pharma Rubber, plastic, non-metals Mining Machine building Metals Food 0% 0% 5% 10% 15% 20% 25% 30% -20% Coke, ref. Share of total Petroleum industrial sales Source: Ukrstat, own calculations Structural change was underway before the conflict: slow growth in key heavy industry sectors (metals, machine building) faster growth in lighter sectors: Food, wood processing, rubber/plastic also fast growth in mining and chemical sector Emerging sectors also have potential for good value added This may lead to the emergence of new industrial regions 8

9 Fastest growth in West and Central Ukraine Sales growth 40% West 35% 30% 25% 20% 15% 10% 5% Regions: Industrial sales growth, and share of industrial sales Central South East 0% 0% 10% 20% 30% 40% Share of industrial sales Source: Ukrstat, own calculations Strongest growth not in the industrial regions of East and South Regions: East: Donetsk, Kharkiv, Lugansk South: Dnipopetrovsk, Kherson, Mykolayiv, Odessa, Zaporizhia Centre: Cherkasy, Chernigiv, Kyiv city/obl., Kirovograd, Poltava, Sumy, Vinnytsia, Zhytomyr West: Chernivtsi, Ivano-Frankivsk, Khmelnytsky, Lviv, Rivne, Ternopil, Volyn, Zakarpatia Reasons: Different industrial structures? Reorientation of trade? 9

10 due to different industrial structure Composition of industrial sales by region, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% West Central South Source: Ukrstat, own calculations East Furniture, other* Machine building Metals Rubber, plastic, nonmetals Pharma Chemical Coke, ref. petroleum Wood, paper Textiles Food Mining West and centre have more focus on faster-growing sectors Strong share of food processing, rubber&plastic, weaker share of metal industry in West and Centre Machine building share similar across regions But composition varies distinctly in West: Focus on electronics and electrical subsectors, transport Supply chain integration into EU car industry Different industrial structures could explain differential regional growth 10

11 but also due to stronger growth in heavy subsectors Sales growth, four largest subsectors by region, % 80% 60% 40% 20% 0% -20% Food Metals Mining Machine building West Central South East Source: Ukrstat, own calculations West and Centre also outperform East and South in growth of metal, mining and machine building sectors Faster growth of West and Centre cannot be explained exclusively with industrial structure Attractiveness of regions for industry seems to have shifted westwards 11

12 3. Challenges 12

13 1. Structural change Real effective exchange rate, based on Index, unit labour cost for Ukraine 2007= Less competitive More competitive Structural change towards labourintensive light industries Devaluation of UAH, slow wage growth: improved competitiveness for labour-intensive industry E.g. labour-intensive parts of EU supply chains Advisable to support growth potential in light industries Modernisation in heavy industries should also be incentivised Source: NBU, Ukrstat, own calculations 13

14 Reorientation of exports Development of exports by destination USD bn Source: UN Comtrade ROW EU Russia Other CIS Russian share of Ukrainian exports has been falling since 2011 due to import substitution, competition Particularly machine building still depends on Russian market Less important for food or metal (global commodity) markets Current political conflict with Russia likely to further contribute to falling exports Reorientation of exports trade entails change of exports structure towards light industry goods DCFTA implementation should further spur exports to EU 14

15 3. Effects of conflict in the East Industrial output 2013 in rebel-held area % of UA industry output in rebel-held area Chemical Furniture, other, repairs Coke, refined petroleum Machine building Mining Electricity 10 Textiles Rubber, plastic 5 Wood, Food paper Pharma Source: Own calculations Output in rebel-held area, UAH bn Metal Possibility that access to industry in rebel-held area in East is lost Production in rebel-held area is strong in metal and mining plus other heavy industries Largely focused on decaying industry subsectors Intermediate goods delivered to rest of Ukraine are commodities and can be replaced by imports Loss of access in East would not severely damage Ukraine s industry Some precautions for loss of intermediate goods sources should be taken 15

16 Synopsis: Trends and challenges Potential and growth in light industries: food processing, rubber/plastic, wood processing and in lighter parts of machine building (e.g. supply chain integration with EU car makers) Reasons: Competitive wages Easy access (geographical, administrative) to EU markets Better business climate in West, where light industry is concentrated Stagnation in older heavy industries: Metal, machine building lack competitiveness Reasons: Lack of investment, technological gap Foregone modernisation of companies in past Dependency on Russian customers in some industries 16

17 4. Policy Options 17

18 Policy Options Policy aims Constraints Growth in newer, light sectors so far cannot make up for decline/stagnation in old, heavy sectors Generally, policy should aim at Promoting growth in light industries Facilitating restructuring in heavy industry Limited means: Situation does not permit commitment of larger public funds Conflict in the East of Ukraine strongly deters investment Strategy Low hanging fruit : Concentrate on attracting investment in light industry in West, Central Ukraine. Communicate potential to investors, remove barriers Consider establishment of cluster councils to improve visibility, communication within sector and with government Facilitate modernisation in heavy sector once investment interest reemerges: Credit supply, assistance in implementation of standards, openness to FDI 18

19 Contact David Saha German Advisory Group c/o BE Berlin Economics GmbH Schillerstr. 59, D Berlin Tel: / Fax: / info@beratergruppe-ukraine.de 19

20 Annex: Composition of sales in machine building 100% Composition of machine building sales, % Transport 60% 40% Machinery and equipment Electrical 20% Computer, electronics 0% Source: Ukrstat West Central South East 20

21 Annex: Destinations of main exports USD bn 6 Exports to EU, Russia and other CIS countries, Source: UN Comtrade EU RUS Other CIS CIS 21

22 Annex: Short term reductions in output Reduction in industrial output, Jan-Apr 2015 over Jan-Apr 2014 Coal mining Coke&refined petroleum Electronics Other manufacturing Transport equipment Media Repair Mining (sector) Metals Chemicals Machinery&equipment n.e.c. Manufacturing sector Rubber&Plastic Furniture Pharma Paper Electrical equipment Textiles Food processing Non-metallic minerals Wood % Source: Ukrstat