Thursday, January 1, 2009

Financial Crisis Kills Ukraine Building Boom

Source : The Business Times, January 1, 2009

Outlook is bleak with high job losses, bankruptcies

(KIEV) Dozens of unfinished buildings dot the Kiev skyline, their abandoned hulks embodying the damage that the world's financial crisis has inflicted on Ukraine.

Grim future: The lives of many Ukrainians are in tatters after the currency went into freefall. Half of the housing and consumer credits are denominated in dollars and repayments are now much more expensive

Silent building sites point to the end of a golden era in which construction boomed, only to be replaced by bankruptcies, tens of thousands of job losses and crippling debt repayments for consumers in the former Soviet republic.

Ukraine has secured a US$16.4 billion loan from the International Monetary Fund. But its outlook is bleak, with the president and prime minister constantly bickering, a gas row brewing with Russia and signs of public discontent growing.

'Ours is probably the most important, yet deprived, sector. It is, therefore, worst hit by the crisis,' said Oleksander Omelchenko, a member of parliament and former mayor of Kiev. 'Forty per cent of construction sites have virtually been put on hold. But the authorities just don't understand that halting projects ends up being more expensive than completing them.'

The construction sector has, like the vast steel industry, been sent reeling by the economic crisis.

It once provided 1.5 million jobs and drew vast numbers of workers into the prosperous, bustling capital from stagnant hinterlands. An end to affordable credits and a sharp drop in the value of the hryvnia currency has brought an abrupt end to that.

Construction companies say prospects are dire and call on the government to shoulder its share of the blame.

'The survivors will be not merely the strongest, but those with the instincts and experience to survive,' said Mykola Tolmachyov, co-owner of TMM, one of Ukraine's biggest companies. 'No one anticipated a crisis of this magnitude. To be honest, we have yet to feel all the consequences and authorities have not taken the steps that could make things easier.'

Shells of unfinished tower blocks with cranes standing idle, piles of unused bricks and paneless windows can be seen in suburbs on the eastern bank of the Dnieper River.

'They said our flat would be ready in the first quarter of 2007. For 11/2 years, I've been getting letters saying it is postponed,' Oleksander Nesteruk, 35, said while standing in the snow outside the unfinished structure. He has invested US$80,000.

Officials say that 80,000 construction workers have lost their jobs last year and expect a similar number in 2009. Tens of thousands of jobs will go in related sectors.

'By the end of 2009, we can expect a further 75,000 to 80,000 job losses,' said Vasyl Kuibida, Minister of Regional Development and Construction. 'And there will be a drop in housing construction projects of something like 40-50 percent.'

Alexander, 43, who came to Kiev from central Ukraine, is one of many workers milling about the railway station, an impromptu labour exchange where news of building jobs circulates.

'In summer there was still work to be had,' he said. 'Now it's just not realistic to even think about it.'

The economy shrank 14.4 per cent and industrial output fell nearly 30 per cent year-on-year last November as demand for steel exports dried up and thousands were sent on unpaid leave.

The hryvnia went into freefall. At one point last December, it stood at half its September value before regaining some ground.

That alone has left the lives of many Ukrainians in tatters.

Half of the housing and consumer credits are denominated in dollars and repayments are now much more expensive. One top official predicts that consumers will default on 60 per cent of bank loans, plunging the banking system into disarray.

Viktor, saddled with a US$100,000 mortgage, says that the new rate has 'created a dramatic situation for people like me'.

'A lot of people are ready to go into Independence Square and stage a revolution,' he says, referring to the mass 2004 'Orange Revolution' protests against election fraud. 'We don't want to do this. But there are people with one, two, three children.'

The construction sector has been hit harder than most. A 13 per cent drop was recorded over 11 months and active work is proceeding at 36 of 186 building sites in the capital.

Five thousand sites stand idle across the country of 46 million.

A proposal to issue one billion hryvnias in state-guaranteed mortgage bonds - to allow completion of 250,000 square metres of housing - was welcomed by the industry, though some officials said that it was tantamount to a 'drop in the bucket'.

But like other policy initiatives, it has been sidelined by months of bickering between President Viktor Yushchenko and his former ally, Prime Minister Yulia Tymoshenko.

'If all decisions already agreed on are carried out in this fashion, there is little hope of emerging from the crisis,' said Oleksander Shlapak, the president's top economic adviser.

The government has approved details of credits to be authorised for construction projects, providing for loans to be financed jointly by contractors and banks.

Parliament has barred banks from raising mortgage interest rates and repossessing property. Further measures to kick-start the industry include a proposal to help buyers with down payments and to ease the tax burden for contractors.

Another proposal would have the central bank sell US$200 million to banks every year at a favourable exchange rate to help cover bad mortgages. Banks say the idea is a good one, though it would not cover all debt and could be open to abuse.

Contraction and regrouping in the industry look inevitable.

'Dozens of companies just don't know if they can carry on as they have been all but cut off from all forms of finance to enable them to complete their projects,' said Stanislav Dubko, head of Ukraine's credit rating agency.

Many officials say the real shot in the arm for the industry will come from Ukraine's biggest development project - the 2012 European soccer championship to be co-hosted with Poland.

That project, already plagued by rows over organisation and delays in stadium construction, calls for hotel construction and modernising of road, rail and air travel networks.

'Euro 2012 will be the chief means of influencing the construction sector,' said Mr Kuibida. 'It is clearly our government's priority to carry out its programme for the event.' - Reuters

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