What can cause inflow of foreign direct investment to Ukraine?

Author : Olexandr Honcharov

12:00, 19 February 2018

What can cause inflow of foreign direct investment to Ukraine?

Author : Olexandr Honcharov

We do not have ready investment projects, and our own policy of encouraging foreign direct investment in the real economy is not that flexible

12:00, 19 February 2018

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Unfortunately, our country has a very bad image on the investment market. That is why we need to focus on improving specific mechanisms of our investment policy rather than the economy as a whole. If we look at the government budget spending for the current year, we will see a drastic reduction in spending on human capital development, research work, and a huge gap with a number of countries that at least somehow finance their digital economy based on high technologies. A similar noticeable lag is seen in the industrial policy.

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I dare to say that in Ukraine, it is very profitable to do business in the financial market (especially in the foreign exchange market), and this is the fundamental reason for the lack of investment in the production sphere. And it is extremely risky to do something in the real sector, that is, to produce specific products. In this regard, it is fair to ask, who pays for the unstable hryvnia, a two-digit inflation rate, the National Bank (NBU) discount rate of 16% and so on? The answer is obvious: production workers and the ordinary Ukrainians are paying for the "benefits" of the currency speculators.

In January 2018, after the NBU have increased the discount rate to 16%, commercial banks have raised the interest rates on new loans in hryvnia for households by 29.7% per annum and for business - by 15.3% per annum. As of the end of January, the total hryvnia loan portfolio of our banking system remained at the level of early 2018 and amounted to only 21 billion USD. We actually have a contraction of the credit market, although the reduction in corporate loans was offset by a slight increase in the volume of loans to the individuals.

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This problem has not yet been solved by our financial authorities, but in the near future, it will become very acute. Moreover, the people's deputies have just voted for a law on the establishment of a single register of debtors in Ukraine. By the way, since April 2018 commercial banks will have to submit information about who received their credit and did not return it. Underestimating the leverage is very dangerous. Remember, when in 2007 the US leverage began to shrink, then the so-called mortgage crisis broke out. Similarly, Ukrainian economy would face a problem if there would be no room for investment.

For example, the individual enterprises will have accumulated hryvnia liquidity. But it is unlikely that producers will invest their profits in the internal government loan bonds, and the population will most likely transfer their savings to dollars and euros. Without seeing investment prospects, everyone will sit and wait for their currency savings to grow, not realizing that we have a long floating exchange rate and that it can swing in any direction. Therefore, market forces can play a cruel joke with the Ukrainian market. But the question is how to create an investment system that would link the banking sector with investments in the development of the real sector of the economy. And what should be done to attract foreign direct investment and encourage domestic investors? First of all, we need a lot of investments in different sectors of the economy. But there are very few of them yet. So, the volume of dividends withdrawn from Ukraine by the results of 2017 amounted to 1.8 billion dollars, and the size of direct foreign investment in the share capital of enterprises is $ 1.2 billion. Therefore, if the Cabinet intends to increase the rate of accumulation, this is a negligible amount of FDI in the Ukrainian economy over the past year.

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Against the background of the degradation of the manufacture, we particularly need direct investments, which will lead to professional management, high technologies, modern equipment, and so on. The most important thing where should we borrow these technologies. In order not to become someone's technical appendage in the future (for example, of some Asian countries). After all, their equipment and technology are still from the second row (in comparison with analogs from the leading industrial countries of the European Union). Frankly speaking, Ukraine should not reproduce a copy, it is necessary to deliver the original.

During the previous years, different cabinets and legislators have created great incentives for the Ukrainian market to attract speculative investments that oppress direct ones. We have a mechanism for launching financial crises: a free capital account - a temporarily strengthening of hryvnia exchange rate - a high yield on financial assets.

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And in order to develop faster, we need a new economic model and there must be a perfect rate of accumulation with a growth potential. The government still does not use those reserves that can be used with the direct foreign investment. Regulatory costs in the Ukrainian market remain very high, the majority of foreign businessmen do not find their usual fair competition environment with understandable tax incentives for them.

Finally, in order to attract direct investments to Ukraine, the Cabinet of Ministers and the Verkhovna Rada should actively follow the domestic demand. And only when we begin to expand the small and medium business, investments of the middle class in shares and corporate bonds of Ukrainian issuers will increase, a new class of institutional investors will form, and the state will promote the development of the national market of joint investment. When the advanced growth in demand of residents begins, we will immediately see flows of investment money from non-residents. Then the "long money" and modern technology of the first series will come to the Ukrainian market.

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