Do You Know Which Emerging Market Is At Risk Of A Liquidity Crisis?

Ukraine Liquidity Crisis
The economy of Ukraine is in serious trouble. To provide some context, Standard & Poor’s recently downgraded the quality of Ukraine’s debt to the same level as Greece.  With a current account deficit of about 8 percent of GDP, Ukraine’s rapidly diminishing foreign currency reserves stand around only 2.5 months of import cover.  In the next couple of months, Ukraine’s debt repayments could exceed their cash reserves, leading to a balance-of-payments crisis and possible default.  With recent economic data all pointing toward an increasingly deteriorating macro-environment, executives operating in Ukraine need to be prepared for the worst.  Even though the country has been able to teeter on the brink of default for an extended period of time so far, the risk and consequences for multinationals are so significant, that companies need to have a plan in place in case this risk materializes.

There is plenty of literature on the reasons for Ukraine’s issues, but not much information on the potential business impacts.  So what would a liquidity crisis mean?  For multinationals, there would be three main effects:

  1. First, expect a large devaluation (perhaps as large as 30%) of the Hryvnia.
  2. Second, both B2B and B2C multinationals’ ability to get paid will suffer as systemic credit dries up.
  3. Third, governmental policies would shift toward populist measures in order to appease the electorate in advance of 2015 presidential elections.  These measures could include increased import tariffs and subsidies for domestic producers, giving advantage to companies that are able to produce locally.

To better gauge the specific implications of Ukraine’s liquidity crisis, FSG has identified the industry-specific consequences below.

Industry

Impact

Consumer Goods/Retail Supported by wage increases, consumer demand has been the strongest driver of the economy.  FSG expects consumer spending to slow dramatically as consumer demand is rapidly depressed by the Hryvnia’s devaluation and combined with slowing wage growth.  This would also impact the government’s ability to pay salaries, pensions, and other social benefits, further harming consumer expenditure.  In previous instances of liquidity crises, consumers have shifted their spending patterns to more traditional channels such as mom and pop stores in response.
Healthcare Accounts receivables will come under pressure as both public and private entities struggle to meet payment obligations.  With the public sector supplying 55% of the total health expenditure in 2013, multinationals should anticipate both decreases and delays in reimbursement.
Heavy Industry Expect delays and/or cancellations of infrastructure developments and capital-intensive projects as government funds are shifted toward urgent repayment capacity.  B2B demand will also weaken as local companies face credit availability issues and lower purchasing power from a devalued Hryvnia.
Technology In an effort to protect domestic industry, companies importing hardware goods into Ukraine can expect challenges around inconsistent policies and changing regulations.  Companies that are reliant on improving infrastructure in their strategic expansion plans will also need to consider alternative strategies for growth as major projects face long delays.

For more information on Ukraine’s looming crisis, FSG clients can refer to FSG’s latest podcast on the situation in the country.

4 thoughts on “Do You Know Which Emerging Market Is At Risk Of A Liquidity Crisis?

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