Middle-week thoughts: crisis development according to the default scenario or default of the default scenarios

Yevhen Pentsak (50) 16 April'09

Tags: banking system, Yevhen Pentsak, crysis, default, currency market, IMF, market

Financial analysts forecast the development of emerging economies for the next two years. The main claimants to the sovereign default remain the same, only the order in rank of the most unreliable is changing. Ukraine is not included in the last rating at all.

Financial modeling assumes thorough econometric (econometrics aims at measuring and predicting of economic performance) analysis of macroeconomic trends. We know that this analysis needs a big sample of countries, true macroeconomic data and safe forecasting model.

If you look at HSBC Bank review for date of December 2008 concerning emerging economies, then you may notice that Ukraine has a high predicting level of a default, but now in April 2009, Ukraine was not included in the list of countries which are analyzed in terms of the bankruptcy risk. Have anybody paid attention to Ukraine already as the world leader in the gas transportation, or just they have no reliable data? I do not know.

However, the predicativity of results of such researches is highly questionable, especially with regard to the model, which builds scoring points (in the table - overall risk ranking, higher score implies higher risk means that the greater this score - the higher the default risk of the country). But on which samples have been calibrated (its parameters were estimated) this model? At pre default situations in the Latin America or the Middle East? Is it appropriate to use them during the global financial crisis? It is easy to criticize every approach, but what we have to do when the world trends and paradigms are changing? We need expert assessments, production of future scenarios of country development by involving the analysts, top managers and owners of businesses in different sectors of the Ukrainian industry. And these methods are effective. For example, in December 2008 in Kyiv-Mohyla Business School top managers and business owners were interviewed concerning the dollar rate at the end of April 2009. They got the following result: the expected forecast of the dollar rate - a range between 7,20-8,60 UAH for the dollar (see Yevhen Pentsak’s advice: sell gold!). So, we can notice the effectiveness of this forecasting method.

I decided to interview representatives of Ukrainian business at the recent round table in KMBS, in order to make a thorough analysis of the development of future events in the Ukrainian business. The discussion was devoted to methods of effective management control at a crisis age. Participants of the round table (among them there were many representatives of major Ukrainian business) answered the following questions:

  1. Will the second tranche of the IMF loan be given to Ukraine?
  2. Will the election of the president of Ukraine take place in October 2009?
  3. Will the mass protests begin before the elections of the president of Ukraine?
  4. Who is the most likely candidate for the presidency: a) Timoshenko; b) Yanukovych ; c) Yatsenyuk; d) Grytsenko?
  5. Will the early elections to the Verkhovna Rada take place?
  6. Will the reformatting of the coalition in the Verkhovna Rada take place in the nearest future?
  7. Have you regarded the opportunity to emigrate abroad?
  8. Will a default in Ukraine take place: a) until September 2009; b) before the end of December 2009; c) will not take place?
  9. What dollar rate do you expect at: a) July; b) October?
  10. How long will the drop of real estate in Ukraine continue? Specify a date.
  11. When will the growth of real estate in Ukraine resume? Specify a date.
  12. Will a recapitalization of Ukrainian banks take place?
  13. If yes then how many?
  14. What percentage of the Ukrainian banks will go bankrupt?
  15. How do you think, which are the most reliable Ukrainian banks? Name five of them.
  16. Do you believe in the prospects of Ukraine's economy?
  17. How do you think, what are the most promising branches of Ukrainian economy in the 2009-2010? Name three of them.
  18. Name three competitive advantages of the Ukrainian economy.

As a result of processing an array of answers to these questions, I managed to find a correlation between answers to different questions and to construct several scenarios for future development, which confirmed my assumptions made in the Yevhen Pentsak's advice: analysts recommend to look at green colors during the crisis period:

Scenario 1): 10% of respondents expressed frustration in the potential of Ukrainian economy; they forecast a quick default, bankruptcy of the banking system and do not exclude the possibility of their migration abroad.

Scenario 2): 70% of respondents believe in the Ukrainian economy and convinced that Ukraine will get the next tranche of IMF credit; they do not expect default of Ukraine, but wait for recapitalization of an average of 10 Ukrainian banks and next presidential elections in October 2009.

Scenario 3): 20% of respondents believe in the Ukrainian economy and convinced that Ukraine will get the next tranche of IMF credit, but they assume default of Ukraine, a wave of mass protests, early elections to the Verkhovna Rada and bankruptcy of 30% of Ukrainian banks.

The expected dollar rate was non-correlated regarding the future scenarios, and was 7,2-9,6 UAH per dollar in July 2009 and 8-12 UAH - in October 2009.

The expected duration of the crisis on the real estate market also proved uncontrolled according to the development of the previous scenarios. Respondents indicated that the decline in the real estate market will end in 11 months, and even in 21 months it begins to increase. You must admit that the prediction is rather pessimistic.

The survey on the selection of reliable banks in Ukraine showed the following results:

  • Raiffeisen Bank,
  • PrivatBank,
  • UkrSibBank,
  • Ukrsotsbank,
  • OTP Bank,
  • UkrEximBank.

Also respondents identified the most prospective economic sector in 2009-2010:

  • agricultural business,
  • FMCG (fast moving consumer goods),
  • IT,
  • pharmaceuticals.

Interlocutors also were solid regarding the competitive advantages of Ukraine:

  • cheap and skilled labor,
  • raw materials,
  • location and size of the country.

I believe that the reader of our web-site can make the best forecast for current situation in Ukraine. That is why I propose all readers to choose the best-suited answer to the question:

I think that the Ukrainian economy will develop according to the scenario (see variants below).

In interactive mode, you will watch the results; therefore, you will see the probability of every scenario. People say the distant our future is, the better it looks. Look in the distant future with optimism: tomorrow will be better!

I wish you all good and happy Easter!


The scenario of ukrainian economy development:

Scenario 1 - 15% (10)
Scenario 2 - 60% (40)
Scenario 3 - 25% (17)

See also:

Мысли среди недели:путь к спасению мировой экономики

Последние события на мировых фондовых рынках заставили задуматься, как близко мы стоим к краю мировой экономической пропасти. События 11 марта 2011 года, 4 августа 2011 уверенно указывают на то, что депрессивное десятилетия начала третьего тысячелетия будет иметь еще более депрессивное продолжение. Движется ли мир в хорошем направлении во всех смыслах слова «добрый»? Может долго держаться макияж, если наносить один слой пудры за другим?

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