1) The document discusses the economic growth and income levels of Ukraine and Central and Eastern European countries from 2000 to 2008. Many CEE economies experienced strong growth and substantial income convergence with the Eurozone during this period. 2) It then analyzes the impact of the global economic downturn on Ukraine and the region. Ukraine suffered one of the worst economic contractions in the first half of 2009, with GDP declining over 13%. Other data showed Ukraine's currency depreciating sharply and the country losing access to external financing. 3) The document concludes by discussing challenges facing Ukraine, including stabilizing its currency, satisfying high demand for foreign cash, shifting to a more flexible exchange rate policy, and finding resources for future

1. Ukraine and CEE in the downturn
Macroeconomic perspective
Lviv Economic Forum
October 1, 2009.

2. The growth rates accelerated strongly after the
integration of countries into EU and development of
Asian countries
Average real GDP growth (%), 2000-2008
9.3%
8.3%
7.6%
7.3% 7.3%
7.0%
6.5% 6.5%
6.2% 6.2%
5.6%
4.5%
4.1% 4.3% 4.3%
3.4%
1.7%
Russia
Estonia
Hungary
Turkey
Belarus
Poland
Romania
Bulgaria
Georgia
Slovenia
Latvia
Euro area
Ukraine
Lithuania
Czech Republic
Slovak Republic
Kazakhstan
Source: Eurostat, Erste Bank Research

3. CEE economies have made a substantial progress in
income convergence
GDP per capita in Purchasing Power Parity (100% = Eurozone)
Slovenia 86%
68%
Czech Republic 59% 74%
Hungary 77%
47%
Slovak Republic 44% 65%
Poland 69%
40%
Estonia 39% 80%
Lithuania 33% 74%
Turkey 32% 52%
Latvia 30% 67%
Russia 63%
30%
Bulgaria 24% 48% 2008
Romania 49% 2000
24%
Belarus 20% 48%
Kazakhstan 45%
19%
Ukraine 29%
13%
Georgia 9% 19%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: IMF, Erste Bank Research

4. Some countries accumulated sizeable amount of
external debt increasing their vulnerability
Gross external debt (% of GDP, Dec-2008)
% of GDP
140%
Intercompany loans
120%
Other long-term debt
100% Long-term securities
Short-term debt instruments
80%
FX reserves
60%
40%
20%
0%
Lithuania
Romania
Latvia
Hungary
Estonia
Poland
Croatia
Bulgaria
Republic
Slovakia
Ukraine
Czech
Source: IMF, Erste Group Research

5. FDIs are seen as long-term, productive capital, difficult
to withdraw
Average Net FDI (% of GDP, 2000-2007)
6.6%
6.4%
5.6%
5.2%
4.7%
4.1%
3.8%
3.3% 3.3% 3.4%
Estonia
Hungary
Republic
Poland
Latvia
Romania
Croatia
Slovakia
Lithuania
Ukraine
Czech
Source: Eurostat, Erste Group Research

6. Ukraine has suffered the worst economic contraction
in 1Q 2009 and one of the worst in 2Q
% Real GDP in 2009, % change
5.0
1Q GDP, y/y
2Q GDP, y/y 0.81.1
0.0
Estonia
Turkey
Hungary
Republic
Republic
Poland
Latvia
Romania
Ukraine
Lithuania
Slovenia
Federation
Slovak
Czech
Russian
-5.0 -4.4
-5.3
-5.6
-6.2 -5.8
-7.0 -6.7
-7.5
-8.3 -8.7
-10.0 -9.3
-9.8
-10.9
-13.3 -13.2
-15.0 -14.3
-18.0 -18.0 -17.6
-20.0 -18.7
-20.3 -20.2
-25.0
Source: Bloomberg, Erste Bank Research

7. Exchange rates, hryvnia suffered worst devaluation in
region, still not on a path to recovery
Exchange rates, 100% = 1 January 2008
180%
170%
Hungary
160% Poland
Romania
150%
Russia
140% Serbia
130% Turkey
Ukraine
120%
110%
100%
90%
80%
Oct-08
Apr-08
Nov-08
Jun-08
Jul-08
Apr-09
Jun-09
Jul-09
Aug-08
Aug-09
Mar-08
Mar-09
Jan-08
Feb-08
Dec-08
Feb-09
May-08
Jan-09
May-09
Sep-08
Sep-09
Source: Bloomberg, Erste Bank Research

8. Ukraine lost access to external financing, caused
strong outflow in 4Q 2008, yields down after IMF loans
Sovereign yields on Eurobonds, %
YTM (bid), %
Ukraine-12
49
Ukraine-13
44
39
34
29
24
19
14
9
4
Oct-08
Apr-09
Apr-09
Nov-08
Nov-08
Jun-09
Jul-09
Jul-09
Aug-09
Sep-08
Dec-08
Dec-08
Jan-09
Mar-09
May-09
May-09
Sep-09
Sep-09
Feb-09
Feb-09
Source: Bloomberg

9. Since February 2009 FX cash purchases became
biggest concern for BoP
NBU interventions, FX cash purchases and sentiment
USD mn sentiment, points
3000 120
Net FX cash purchases
2000 Net NBU interventions
100
Consumer sentiment
1000
80
0
Nov-08
Aug-08
Feb-09
Apr-09
Aug-09
Dec-08
May-09
Jun-08
Jul-08
Sep-08
Oct-08
Jun-09
Jan-09
Mar-09
Jul-09
-1000 60
-2000
40
-3000
20
-4000
-5000 0
Source: NBU, GfK Ukraine
9

10. NBU’s main trouble is to satisfy demand from
population
– FX cash outside banks is Balance of payments
Current account
Aug 08 Jan-Aug 08 Aug 09 Jan-Aug 09
-815 -8 073 -44 -1 142
responsible for 52% of the total Balance of Trade -978 -9 916 -142 -1 680
Exports of goods and services 8 701 59 536 4 759 33 170
first 8M negative BoP Imports of goods and services -9 679 -69 452 -4 901 -34 850
Incomes (balance)
– Rollover ratios for gross external
-102 -321 -98 -1 568
Transfers (balance) 265 2 164 196 2 106
Capital and Financial
debt at 76%, trade balance only Accounts Balance 2 162 14 302 -2 574 -9 707
FDI (balance) 1 204 8 140 118 2 521
slightly negative Loans and bonds (balance) 1 897 11 937 -1 694 -7 126
– FX cash outside banking system Medium and Long-Term
Loans, Bonds (balance) 1 476 10 022 -768 -3 066
(purchase of foreign currency incl govt
incl banks
-266
1 073
-466
6 040
-525
-38
-841
-1 290
cash) put biggest pressure on incl other sectors 669 4 448 -205 -935
Short-term loans 421 1 915 -926 -4 060
BoP, sentiment is the biggest incl banks 105 1095 -894 -4 077
incl other sectors 316 820 -32 17
problem to stabilize the pressure Other capital -952 -6 155 -961 -5 081
incl. FX cash out of banks -1 017 -5 833 -554 -5 676
on hryvnia Balance of Payments 1 347 6 229 -2 618 -10 849
Supplementary information:
Exports of goods and services, y/y 50% 46% -45% -44%
Imports of goods and services, y/y 54% 55% -49% -50%
Source: NBU
10

11. Ukrainians already see recovery, yet very sensitive to
comments on economy
– Sentiment decreased on 120
Consumer confidence
inflationary expectations for
100
August-September on
comments that state budget will 80
need “hryvnia printing” to be 60
covered 40
Consumer Confidence Index (CCI)
– Ukrainians are already Index of the Current Situation (ICS)
20
expecting recovery in the long- Index of Economic Expectations
term, worst fears left behind in 0 (IEE)
Apr-07
Aug-07
Oct-07
Apr-08
Aug-08
Oct-08
Apr-09
Jun-07
Jun-08
Jun-09
Dec-07
Dec-08
Feb-07
Feb-08
Feb-09
February 2009, long-term
expectation notable exceed
current estimation of current
situation
Source: GfK Ukraine
11

12. NBU will have to shift to more flexible exchange rate
policy as FX reserves drained
FX reserves and monetary base dynamics
Currency bn
200 Monetary base 14
12.70
180
Net FX reserves 12
160
140 Coverage ratio 10
Monetary base / Net
120 FX reserves
8
100 5.77
5.53
6
80
4.35
5.92
60 4
4.27 4.37
40
2
20
0 0
2003 2004 2005 2006 2007 2008 2009F
Source: NBU, Erste Bank Research
12

13. Banks are suffering severe losses
Bank’s net income, UAH mn
6620 7304
4144
2170
685 827 1263
2002 2003 2004 2005 2006 2007 2008 8M 2009
-20 503
Source: NBU
13

14. Costs of banks rescue
Length of banking crises and government’s cost of bank rescue in % of GDP
years
12
10
Spain 77-85
8 Chile 81-87
Norway 87-93 Phillipines 81-87
6
France 91-95 Malaysia 85-88 Kazakhstan 91-95
4 Estonia 92-95
Finland 91-95
Sweden 90-93
2
Ukraine 08-…
% of GDP
0
0 2 4 6 8 10 12 14
Source: IMF
14

15. Where to take the resources for future development?
– Since September 2008 banks have lost 28% of total hryvnia deposits, and
14% of total foreign currency deposits
– Refinancing from NBU stands at 20% of total local currency banking system
assets
UAH mn L/D ratio
800 000 2.5
700 000 Total loans
L/D ratio 2
600 000
500 000 1.5
400 000
300 000 1
200 000
0.5
100 000
0 0
Nov-05
Jun-05
Apr-06
Jul-07
Oct-08
Aug-09
May-08
Mar-09
Jan-05
Sep-06
Feb-07
Dec-07
Source: NBU
15

16. The road to house prices extreme rise and collapse
and trade balance deficits
Ease of doing business rating from World Bank, 2008 survey
Ease of
Dealing with
Doing Starting a Registering Getting Paying Enforcing
Construction
Business Business Property Credit Taxes Contracts
Permits
Rank
Georgia 11 5 7 2 30 64 41
Estonia 24 37 20 13 43 38 49
Lithuania 26 99 64 4 43 51 17
Latvia 27 51 78 58 4 45 15
Slovak Republic 42 66 56 11 15 120 61
Slovenia 53 26 59 108 87 84 60
Romania 55 42 91 92 15 149 55
Belarus 58 7 44 10 113 183 12
Kazakhstan 63 82 143 31 43 52 34
Poland 72 117 164 88 15 151 75
Turkey 73 56 133 36 71 75 27
Czech Republic 74 113 76 62 43 121 82
Croatia 103 101 144 109 61 39 45
Russian Federation 120 106 182 45 87 103 19
Ukraine 142 134 181 141 30 181 43
Source: World Bank

17. High tax burden, paying taxes is made complicated by
administrative regulation
Ukraine sets 181 place of 183 State budget revenue and
surveyed countries by World % of GDP expenditure level, % of GDP
Bank in ease of paying taxes and
has the highest level of taxes
amongst comparator countries
Source: IMF

18. Necessary actions
Match economic reforms to the level of financial liberalization:
“ease” of starting a business or getting a construction permit should be
equal to “ease” of getting a loan, lift administrative pressure on staring a
business or receiving construction permit, decrease tax burden, make
paying taxes easier
Ensure sentiment stability among population: sustain transparent
fiscal and monetary policies, create political stability

19. Pavel Cetkovsky
Deputy CEO
Erste Bank
E-mail: Pavel.Cetkovsky@erstebank.ua
Tel.: 8044 593 0000