OUTLOOK FOR CENTRAL AND EASTERN EUROPE
1996
was a banner year for the leading transitional economies of Central and
Eastern Europe. Hungary and Poland both gained admittance to the 28-member
club of industrial economies, the Organization for Economic Cooperation
and Development (OECD), following the lead of the Czech Republic, which
became a member of the OECD in December 1995. While there are no direct
benefits to being a member of the OECD, there are substantial indirect benefits
- principal among them, perhaps, gaining the increased confidence of the
international investment community.
Hungary, Poland
and the Slovak Republic all had their Standard & Poor's sovereign credit
ratings upgraded to BBB- (from BB+ for Hungary and the Slovak Republic,
and from BB for Poland). Slovenia received an even more impressive A rating.
The Czech Republic maintained its A rating.
Most importantly,
perhaps, this recognition from the OECD and the leading credit rating agencies
genuinely reflects the underlying strength of the recipients' economies.
And it will contribute to the region's further progress.
Poland
Poland was an
early standout in the region, and is widely considered Eastern Europe's
"tiger economy." Economic growth slipped a bit in 1996, falling
to a projected 5.5 percent from a jaw-dropping 7 percent in 1995. Growth
in industrial production is also down, from 9.4 percent last year to a projected
8.0 percent for 1996.
These figures,
of course, remain impressive, and continued robust GDP growth of 5 percent
is forecast for the next several years. Poland, meanwhile, continues to
make steady progress in taming inflation and unemployment. At a projected
18 percent for the year, inflation is less than half the annualized rate
for 1993. The OECD projects a further decline to 14 percent in 1997. Unemployment
is also gradually trending downward from a peak of 16 percent in 1994 to
approximately 14 percent this year and 13 percent next year.
The Warsaw Stock
Exchange is up 78 percent in dollar terms since the beginning of the year,
and an end to the bull market is nowhere in sight. Although not computed
in the Exchange's composite figure, 1996 also saw robust growth in the value
of vouchers from the government's Mass Privatization Program (MPP). In the
course of a year-long sale begun in November 1995, 95 percent of eligible
Poles purchased a privatization voucher for 20 zlotys (US$7.10). The vouchers
are now trading at better than 150 zlotys.
By the middle
of next year privatization vouchers will be redeemable for shares in 15
National Investment Funds, holding companies for 512 formerly state enterprises.
1997 should see continued robust share price appreciation on the Warsaw
Stock Exchange as trading in these assets begins.
Czech Republic
The overall healthy
state of the Czech economy and the stability of its government have been
rewarded with abundant FDI ($458 million in the first half of 1996, $6 billion
altogether since 1990) and a sterling A credit rating from Standard &
Poor's. Next year the Czech Republic can anticipate real GDP growth of 5.3
percent, up from 4.8 percent this year, and relatively moderate inflation
of 7.6 percent.
Perhaps the most
positive Czech economic indicators are its impressive unemployment rates-which
this year have dipped below the current 3.5 percent countrywide and minuscule
0.3 percent in the capital, Prague.
The Czech Republic
has been troubled this year, however, by slowing industrial output and stagnant
wages. Discontent over these trends, combined with a series of high-profile
bank failures, contributed to two electoral setbacks for the ruling coalition
headed by the reformist Civic Democratic Party (ODS): the loss of an outright
majority in the lower house of the parliament last June, and the failure
to gain an outright majority in the Senate after that body's first-ever
elections in November. The election outcomes will require the government
to compromise with its rivals, which are still largely pro-reform.
Portfolio investment
in the Czech Republic lags behind that in Hungary, Poland, and Russia. The
Prague Stock Exchange has gained only about 20 percent in dollar terms this
year on very low volume. Much of the difficulty lies in a lack of transparency,
which was addressed in a 1996 amendment to the original 1993 securities
law. Tight enforcement of the amendment should build confidence in the market
in 1997.
The sweet smell of success
Last year, you
could have taken our predictions straight to the bank: as predicted, in
1996 the Czech Republic, Poland, and Hungary outperformed not only their
former Warsaw Treaty colleagues. They also did better than some of their
neighbors to the West.
There's also
an unexpected competitor. A very strong economic performance enabled Slovakia
to come from behind and join the ranks of the achievers which, frankly,
surprised us and scores of other observers. In fact, the region as a whole
experienced a kind of rebirth in 1996.
Sales rose 40%
in 1995, and accelerated throughout 1996. Trade between Czechs and Poles
alone more than doubled. The region continues to be at the center of attention
of foreign investors and still gets the lion's share of all the bucks flowing
East.
(Take Hungary,
for example: This country has a fraction of the territory and population
of Russia, none of its vast natural resources, very few of its problems,
and gets much more foreign capital than its mighty neighbor.)
It also became
apparent that prosperity is by no means guaranteed. This prompts us to scale
down a bit the enthusiasm we exhibited last year.
Here's what we see coming
Hungary had the
best-performing stock exchange and the slowest-growing economy in 1996.
It was embroiled in a bitter privatization scandal. The government still
seems to be conducting its business in some kind of a lobby with many revolving
doors - there is always a minister on the way in or out - which has certainly
affected its work.
The Czech Republic
was rattled by a banking crisis. Lack of liquidity brought its market to
a virtual standstill, and scared foreign investors into Budapest and Warsaw
instead. As we predicted, Prime Minister Klaus won the election and kept
his job - but lost his majority in the lower House of Parliament.
Poland, on the
other hand - up to now the star performer and Central Europe's largest economy
- may be slipping back into its old, bad habits. Political bickering has
kept vital reforms behind schedule, at the same time leaving the monopolies
and the social security system virtually unchanged. Key areas of the economy
are still closed to competition - and, of course, to investors.
Slovakia's economic
success came about despite the constant tension which has plagued its government
for years (and is mostly attributed to the autocratic and unorthodox leadership
of Prime Minister Vladimir Meciar).
The private sector
The private sector
in these countries has grown steadily since transition began. It now accounts,
in all four countries, for larger shares of GDP and employment than the
public sector. And although state ownership still dominates the industrial
sector, private ownership prevails in the light manufacturing and service
sectors, and virtually all small and medium-sized enterprises are now privately
owned.
In the Czech
Republic - due largely to the rapid privatization of the state sector -
more than three-fourths of state-owned assets have already been privatized.
In the other three countries, where the pace of privatization has been slower,
growth can be attributed largely to start-ups of new, mainly small and medium-sized
private enterprises.
Two out of every
three workers in Hungary are now employed by a private company, and nearly
75 percent of GDP is already generated by financial, legal, consulting,
tourism, entertainment, and other "nonmaterial" services. A striking
increase in self-employment has also been reported from Hungary, where more
than 400,000 small private businesses have been started since 1990.
Poland initially
had a higher private sector output than the other three, mainly due to the
fact that agriculture had been privatized since pre-communist times. That
country still has nearly four thousand state-owned enterprises, which dominate
the heavy industry, mining and transportation, but it also has nearly five
million owner-operated businesses - more than any of the others.
In Slovakia,
private-sector growth has been concentrated on services and a single location
- the capital of Bratislava. Though with limited opportunities for expansion,
private businesses in Slovakia employ over 1.2 million people and contribute
62% of GDP.
Hungary: Bull market with paprika
This past October
the Budapest Stock Exchange edged out the Venezuelan exchange to become
the world's top performer. Of course, with year-to-date dollar-term percentage
gains in the low triple digits, it doesn't matter whether Budapest comes
in win or place, or even show. For the investor who got in early, the payoff
has been very sweet.
Hungary has attracted
US$14 billion in foreign direct investment (FDI) since 1990 - more than
half of all the FDI that has flowed into all of Central and Eastern Europe
and the former Soviet Union. The US$1.1 billion pumped in between January
and August represents a 42 percent increase year-on-year.
High FDI is testimony
to the great money-making promise of the Hungarian economy, and the faith
of foreign investors in the government's commitment to economic reform.
It also reflects the government's robust privatization program, which has
brought companies accounting for some 70 percent of Hungarian GDP into private
- largely foreign - hands.
Next year the
Hungarian economy will grow approximately 3.0 percent, with especially robust
growth expected in the telecommunications, services and automotive sectors.
The spectacular
rise of the Budapest Stock Exchange index (BUX) in 1996 - more than 140
percent - ended a long period during which the index languished: it rose
"only" 17% in 1994 and fell slightly in 1995.
Only 34 companies
are quoted on the stock exchange. Strong performances from a handful of
shares in the pharmaceuticals, plastics and banking sectors led the 1996
gains. In addition, the value of compensation coupons increased sharply
throughout the year. This contrasts markedly with the wider economic performance,
where Hungary had one of the slowest-growing economies in the region.
Several factors
contributed significantly to the rise of the BUX. The low levels of U.S.
short-term interest rates have stimulated interest in the emerging equity
markets in general among those seeking higher yields. Also, unlike some
regional bourses - which are characterized by local susceptibilities and
low volumes - and because of its increasing dependence on foreign investment,
Budapest usually follows Wall Street's and London's lead.
Hungary's admission
to the OECD and an agreement on a new stand-by facility with the IMF last
March increased interest from abroad, as Hungary improved its image as a
secure investment destination.
Other reasons
include the economic stabilization measures initiated by former finance
minister Lajos Bokros. There was uncertainty over Russia's political and
economic prospects prior to last summer's presidential election - which
had drawn investors to Hungary - particularly Hungarian firms exporting
to Russia.
(This goes a
long way to explain the popularity of Egis and Richter Gedeon - both have
strong exports to Russia and the CIS as a result of their communist-era
ties. Shares on the Warsaw and Prague stock exchanges, which have also risen
strongly, are marginally less attractive than Hungarian stocks, apparently
owing in part to perceived higher political risk in Poland, and to higher
liquidity risk seen on the Prague Stock Exchange.)
Richter Gedeon's
issue of shares in October 1995 was followed by a 60% rise in stocks price
by the end of the year, against a stagnant index. Another puszta power play
is Egis, Hungary's largest pharmaceuticals firm. The two nearly doubled
their profits in 1995, owing mainly to burgeoning exports.
The strong performers
in plastics were Graboplast and Pannonplast. Like Richter and Egis, both
are large companies, dating from pre-communist times, which have been successfully
restructured since 1990. BorsodChem, another communist-era giant and a large
manufacturer of PVC, entered the stock market in late March and has performed
strongly since.
The two banks
quoted on the stock exchange, OTP and Inter-Europa Bank, also performed
strongly, owing mainly to new legislation which lowered restrictions on
foreign ownership of local banks.
Between 1990
and 1994 the government issued compensation coupons which remained low as
long as it was clear that the prime candidates for privatization would be
sold for cash to foreign investors, rather than through the distribution
of shares to citizens. The coupons rose sharply in 1996 as several employee
share ownership schemes, most notably in the privatized electricity distribution
and power companies, were implemented via compensation coupons.
There are some
doubts if the BUX's strong performance can continue. Domestic companies
may not be able to continue showing such strong profit improvements once
inflation falls significantly and real wages start to rise again. Moreover,
like other emerging markets, Hungary depends on the level of U.S. short-term
interest rates. If these rise, much portfolio investment will go to U.S.
Treasuries rather than higher-risk emerging market stocks. This mechanism
was reflected in the BUX's 13% fall in the summer.
However, the
outlook is improved by the prospect of the establishment of private pension
funds over the next few years, as part of the government's initiatives to
reform the pension system. Many of the pension funds are likely to focus
on government bonds as safe investments, but there is also likely to be
a rising demand from this source for stocks and shares.
Taipan's 1997 Forecast:
1997 will be
another good year for Poland. Its healthy economy will experience at least
5% GDP growth and continue to attract sufficient foreign investors to add
another US$4 billion in its economy. On the basis of the government's good
economic performance, the ruling coalition of mostly left-wing parties will
win the parliamentary elections and stay in power. That may even convince
the West that the Left has shed all of its "red" ideological baggage
and replaced it with pragmatic free market capitalism.
The Czech Republic
will also do reasonably well. The performance of the banking sector will
markedly improve and several big banks will find new owners abroad. In politics,
the opposition Social Democrats have already limited the government's maneuvering
ground. Though the rivalry between their leader, Milos Zeman, and Prime
Minister Vaclav Klaus, is as strong as ever, if Klaus survives the year,
they will be able to work together when the country's interests and future
are concerned.
Hungary will
at least double its GDP growth and increase the chances of the ruling socialists
of remaining in power after the 1998 elections. Its market, as mentioned
earlier, will rise to new heights on an improved economic performance and
a strong investor interest.
Slovakia may
have already peaked economically in 1996 and will have difficulty in sustaining
last year's growth rate. A growing deficit and deteriorating trade will
be the two darkest clouds on its horizon. We do not predict any political
changes: Mr. Meciar's powerful presence will not be challenged by a weak,
unfocused opposition.
The Balkans: The times they are a-changing
A year after
the Dayton accords, an accommodation of sorts appears to be taking hold
between the three sides in Bosnia, which will likely steady itself now that
the United States has signed on to an extension of NATO-IFOR until mid-1998.
In Belgrade last
November, the ruling Serbian Socialist Party suffered a humiliating defeat
in the municipal elections - an event which may become the writing on the
wall for president Slobodan Milosevic, who tried to overturn the results.
In the Bulgarian
presidential election, the candidate of the opposition Union of Democratic
Forces won easily in the run-off against his opponent from the ruling Bulgarian
Socialist Party. He may have opened the door for a victory of the conservatives
against the former communists in next year's parliamentary elections.
Romania was the
biggest surprise of all - against the expectations of most observers, the
Party of Social Democracy of President Ion Iliescu lost the seat of power
it had occupied since the violent overthrow of Nicolae Ceausescu in 1989.
Emil Constantinescu and his reformist Democratic Convention were able to
channel the anger of the electorate at the incompetence of a government
not delivering on its promises.
The Economy
The economies
of the countries in the region, with the exception of Slovenia and Croatia,
and to a certain extent Romania, have not yet been able to recover to their
pre-transition levels.
The economy of
the former Yugoslavia is in ruins. Most of the year, the country remained
isolated. A severe banking crisis and a debilitating series of national
strikes did most of the harm. After a year of peace, most of the region
was actually worse off than a year ago.
Without war,
but with a crippling economic embargo against the former Yugoslavia (costing
billions of dollars in lost trade), Bulgaria is not faring any better than
its neighbor. The indecisiveness of the socialist government only aggravated
a very serious situation. At the end of 1996, with a stalled economy, hyperinflation
and almost no foreign investment, that country also found itself on the
brink of disaster.
Though not in
such a tragic condition, the economies of Albania and Macedonia fared only
slightly better, while Romania showed signs of a fragile economic recovery
in 1996 with an increased industrial output, increased investments and a
greater number of privatized companies.
Bosnia was different.
With no economy of its own, it was on life support all through 1996. Some
progress was made, projects worth millions of dollars were initiated, but
the political difficulties were and continue to be so enormous, it is hard
to believe people will work together if they don't want to live together
under one roof.
The two success
stories in the Balkans are Slovenia and Croatia. Slovenia has the highest
per capita GDP among the former communist states, close to US$10,000, low
inflation (about 10%), liberalized prices, and a privatized economy which
achieved about 3 percent growth.
The main criticism
leveled at Slovenia was that its economic transformation had been too gradual.
Croatia was a similar economic success story in 1996, despite the fact that
it was an active participant in the war in Bosnia.
The Croatian
kuna is one of the most stable currencies in Europe, while inflation for
the first nine months was down to an incredible 3.1 percent. The stability
of the kuna has encouraged considerable foreign investment. In fact there
is a well-grounded fear that Croatia may become the victim of its own success
- it's a small country, and too much investment in too short a period of
time may disturb the balance of its financial system.
Taipan's 1997 Forecast:
The region will
continue to develop at an uneven pace. Those who did well in 1996 will also
do well in 1997. Their growth may slow down a bit, but no major changes
to monetary or fiscal policy are expected, and the emphasis for both Slovenia
and Croatia will be on stability.
With a new president
and government, Romania has very good chances to stay on the road of economic
recovery. The success of the recovery will also depend on whether the government
decides to fulfill the populist promises it made before coming to power,
or shelve at least some of them for a while.
Penniless and
unable to secure loans, Bulgaria may commit the ultimate financial sin -
default on its debt-service payments. The dismal economic performance, grave
financial crisis and widespread unrest in the first months of 1997 will
kick the socialists out of office as soon as new parliamentary elections
are held.
In Serbia, the
Belgrade regime will never be able to recover from the strong vote of no
confidence, expressed in the demonstrations in the last two months of 1996.
Will it fall in 1997? It will, in the face of an united opposition which
proves that it has not only booing power, but also a viable program for
economic recovery and the ability to carry it out. Sadly, the current opposition
does not measure up to the task, and that may postpone the inevitable.
Bosnia will continue
to be a hotbed of tension. Hundreds of millions of dollars will be spent
to restore its infrastructure and rebuild its economy, but little progress
will be made until a political solution, acceptable to all three sides,
is found.
Few are optimistic
that such a solution exists in the current framework, though developments
cannot be stalled indefinitely either. At the end of 1996 the American government
gave Bosnia 100 million dollars' worth of heavy armaments. While that will
not prompt the Serbs and the Croatians to give up their arms (though they
agreed to it at Dayton), we hope those shipments do not give the Bosnians
any ideas and turn yesterday's helpless victims into tomorrow's merciless
bullies.
Outlook for the Baltics
Inflation for
the first 9 months was lowest in Latvia - 10.3 percent, followed by Lithuania,
10.7 percent, and Estonia, 12.6 percent. In August, for the first time since
the restoration of independence, Lithuania had zero inflation. Overall,
Latvia again had the lowest inflation among the Baltic states in 1996 -
18 percent - with 25 percent in Estonia and 30 percent in Lithuania.
Estonia has been
rated as the most impressive banking sector in Central Europe, with real
credit growth at 45 percent in 1996, average return on equity at 26.7 percent,
bad debt ratios at 4.7 percent, and 75 percent of the adult population with
bank accounts. The secret to Estonia's success has been tight financial
management and restrictions.
Unfortunately,
these impressive results are an exception rather than the rule in the Baltics,
as the other two countries are recovering from serious banking crises. Lithuania
is experiencing the aftereffects from the closure of its two top banks.
Latvia is still reeling from the sinking of its biggest bank, which went
under with a US$400 million bad debt portfolio.
The Economy
The Estonian
economy is the best-performing of the three Baltic states. Latvia's economy
remained depressed in 1996, with a growth target of 1 percent at best. Lithuania
is in a very similar situation - it will be lucky to get even half a percent
growth (as expected, the 2.5 percent GDP growth rate of 1995 was not repeated
because of the banking crisis).
The Estonian
economy grew 3 percent in 1995, and was able to sustain the same rate in
1996. These numbers may give the impression that the Baltics are not making
a lot of progress. But don't forget that it will take more than a few years
to get over the legacy of 50 years of Soviet rule.
At present, the
growth of the economies of the three countries is hindered by the low competitiveness
of their goods and services on the international market, the shortage of
capital, their small domestic markets and the lack of skilled workers. That
list can be extended much longer. It will probably take a few more years
before they catch up with their Central European colleagues from the former
Warsaw Treaty.
Taipan's 1997 Forecast:
The conservatives,
who returned to power in Lithuania at the end of 1996, will govern successfully
and with a comfortable majority, while the cracks in the facade of the coalition
at the helm in Estonia may develop into deep crevices.
The stars are
aligned just right for the Baltics' swift economic recovery. Estonia may
experience as much as 5 percent GDP growth, while Lithuania and Latvia are
poised for a more modest 2 percent growth each.
Foreign investment
will return to the region, encouraged by the economic recovery and the hope
for more aggressively pursued privatization programs.
Outlook for some CIS Countries
For the first
time this year we cover some of the former Soviet republics, which are now
part of a loose coalition, often referred to as the Commonwealth of Independent
States (CIS).
This reflects
their higher visibility on the world economic scene and an increased investor
interest in their offerings. Just as important, some of them seem to have
put the worst behind them, with encouraging signs of positive economic growth
for the first time since their independence from the former Soviet Union.
In the same breath
we would like to mention, however, that in other areas things are not developing
so well - organized crime, which we have often covered in the pages of Taipan,
has consolidated its grip on their fragile economies by forging close ties
with party and government officials.
Ukraine - Foreign Investment
Ukraine possesses
substantial natural resources (particularly mineral), a comparatively well
educated workforce and low labor costs. Geographically, it is well located
with respect to both Russian and Central and West European markets.
The acceleration
of economic reforms since 1994 has increased the flow of investments and
in 1996 their cumulative amount reached about one billion dollars. The largest
investment share came from the United States (23 percent), followed by Germany
(18 percent), the United Kingdom (6 percent), Cyprus (5.1 percent - money-laundered
off-shore and brought back into the country), and Russia (5 percent).
Russia's share
is much larger than those estimates because Russian investments take place
through channels not reflected in official statistics.
The list of factors
which contributed to the increased investment inflow in 1996 includes the
adoption of a new constitution, the continuing work on a civil code, modeled
on the German example, the passage of key economic legislation, most important
of which was the new Foreign Investment Law, the progress made towards financial
stabilization and last, but not least, the efforts to adopt tough measures
to reduce economic crime in the state sector.
There are also
serious obstacles to the increase in foreign investment. Most often cited
are the poor market reforms. They have been relatively slow, and market
mechanisms and institutions are still underdeveloped. Administrative interference
on the part of local officials continues to be fairly common; economic legislation
changes frequently; privatization has also been slow. There are restrictions
on private land ownership; the tax system is confiscatory; and there is
considerable uncertainty about the future of economic reform.
Another very
strong deterrent has been crime and corruption. Economic life is highly
criminalized, and corruption is widespread. Outsiders face particular difficulties
in attempting to operate in an environment where the shadow economy - with
its reliance on networks of contacts and local knowledge - accounts for
perhaps 40 percent of economic activity. Here is an example:
Kazakhstan - Economic Prospects
The economy gradually
emerged from recession in 1996. Real GDP, which fell by 9% in 1995, grew
by around 1% year-on-year, and industrial output rose by 0.5%. The recovery
was led by an upturn in the performance of the energy and extractive sectors,
which benefited from considerable inflows of foreign direct investment.
Inflation is
also gradually easing under an IMF stabilization program. Banking reform
has strengthened the tenge, Kazakhstan's currency, consolidated the banking
system and toughened supervision. It has also revitalized the four major
state-owned banks which make up the core of the banking system. Coupon privatization
was recently completed - 51% of the equity in some 1700 retail trading,
construction and agro-industrial firms were exchanged for coupons at auctions.
Privatization efforts are focusing on the energy and telecommunications
sectors, where major players from abroad are expected to step in.
Early last November
Kazakhstan was given its first speculative credit rating. Standard and Poor's
and IBCA awarded the country's long-term foreign currency debt a BB- grade.
This cautious assessment acknowledges that the country's relatively successful
shift to a market economy and improving external liquidity position are
constrained by its landlocked status.
At present, Kazakhstan
relies on Russian pipelines for the export of the bulk of its crude oil.
In this respect the commencement of exports via oil swaps with Iran and
the agreement by the Caspian Pipeline Consortium on a construction of an
export pipeline to Russia's port of Novorossiisk on the Black Sea will both
boost the prospects of the economy as a whole.
By the beginning
of 1996 the cumulative value of foreign direct investments had reached US$2.6
billion. It was highly concentrated in a few industries: 35 percent in mining,
37 percent in tobacco and 10 percent in metallurgy. President Nursultan
Nazarbayev has proposed increased incentives to greenfield investments incorporating
modern equipment and technology. Parliament is considering a draft law which
would entitle foreign investors to tax holidays for the first five to seven
years of investment.
Azerbaijan - Signs of Recovery
Economic decline
appears to be bottoming out, and in 1997 Azerbaijan is expected to see the
beginnings of an upturn for the first time. The situation has improved so
dramatically - inflation has declined, the local currency, the manat, has
been stabilized - that many foreign companies are involved or have announced
intentions of getting involved in international projects in the country.
Of course, Azerbaijan
has one of the hottest commodities on earth to offer. A total of US$14 billion
is expected to be invested in the Azerbaijani oil industry. However, oil
fields take years to develop. The US$4 billion "deal of the century"
to produce oil from the huge Azeri, Chirag, and Guneshli oil fields is not
expected to produce at full capacity until the year 2006.
That is why,
although most of the attention is still on the oil, Baku is attempting to
explore other opportunities as well. Japanese investors, for example, are
looking into the energy sector, but have also recently announced that they
intend to funnel about US$400 million into chemical projects. Cotton can
be another profitable activity in that country, and last but not least Azerbaijan
will try to capitalize on its favorable geographical location between Asia
and Europe and become an international transit center.
If there are
two things to dampen one's optimism, they are the same two things encountered
in every country in that region: terrible communications and a bureaucratic
and wasteful government. But while the former can be remedied with proper
investment in only a few years, the latter will probably take longer as
old habits, as we all know, die hard.
Taipan's 1997 Forecast:
The economy of
Ukraine will post its first positive GDP growth in 1997. Considering the
slow pace of reforms, this will be quite an accomplishment. Foreign investment
inflow will continue to increase though the amounts will be modest. President
Leonid Kuchma still enjoys considerable clout but the lines of his supporters
may begin to thin out if the economy is too slow in picking up speed. The
opposition will use every opportunity to challenge his policies.
Taipan predicts
that in 1997 Kazakhstan will continue to be wooed by both Russia and the
West. Privatization of state-owned industries will be completed. Increased
oil production and a billion and a half U.S. dollar in foreign investments
will enable the country to achieve easily up to 3 percent of GDP growth.
Oil-rich Azerbaijan
will also do well and for the same reasons as Kazakhstan, though its progress
will be more modest. The region of Nagorno-Karabakh will continue to be
a bone of contention with neighboring Armenia. At the OSCE summit in Lisbon
last December Europe refused to take sides in the conflict, and that was
perceived as a victory for Azerbaijan. That issue will not be resolved in
1997.