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Off the books. Why the state and business fail to receive billions of dollars

The Ukrainian economy and enterprises are undervalued by at least ten times, despite the fact that they have the potential to attract billions of dollars in international investment provided that the stock market is running.

Role and significance of stock market for the economy
Nowadays, with the global and Ukrainian economies being constantly challenged, investment attractiveness becomes more significant. Whereas the stock market and the capitalization of Ukrainian enterprises play an essential part in offering a multitude of benefits for the country's growth and development.

While the global M&A market sets new records on activity and volume, we get far too little. It is no secret that international investment is a scarce resource for Ukraine.
According to European Business Association research, the national investment index on a Likert scale scored 2,4 out of 5 points in the second half of 2020. This is 0.11 point lower than that of the prior period.

Aside from the legislative obstacles, the ambiguity of tax and court legislation, and the risk of terminating ties with the IMF, the low rate of Ukrainian stock market capitalisation contributes to a downturn in the investment climate.

What is the effect of capitalization within the country?
Financial and stock markets that are healthy and developed create a foundation for economic progress and citizen well-being. The stock market ensures that capital is distributed evenly within the country while also attracting direct and portfolio investment. Capitalization = the value of a country's businesses. The greater the value, the easier it is for businesses to access investment instruments that ensure growth and development, while individuals gain a tool for capital accumulation and well-being improvement. The more taxes paid, the wealthier the population of a certain country. As a bonus, we see an improvement of citizens' financial literacy and more efficient deployment of their capital: not stashing cash under a mattress, but in local businesses they know. For the time being, up to $10 billion is buried under a mattress.

What do we have now?

The Ukrainian stock market is inert, despite its enormous potential. The Cabinet of Ministers announced the adoption of a Memorandum on the establishment of a stock market as early as the winter, but the process has been dragged on until today. Mr. Shmyhal, the Prime Minister, claimed that in order for the market to properly function, legislative revisions would be required, which would take three years. A rather long period is attributable to a number of factors that contribute to the Ukrainian stock market's inability to function:

●      There is a lack of complex regulation of relationships arising from stock emission and turnover.
●      On the stock market, there is a lack of proper infrastructure. It's not only about stock exchanges. During the last few years, the banking system has undergone significant restructuring, which was accompanied by a reduction in financial instruments. Banks now have a lot of liquidity and only invest in government bonds. With this, the National Bank will have to rebuild the stock market infrastructure from scratch.
●      Failed pension reform, which was intended to guide pension and investment funds how to save money. The funds would eventually have a rational need to invest.
●      The overall lack of trust in the financial system and national currency, which forces capital to flow back to markets with independent infrastructure. People are reluctant to invest in their own country, whilst actively sending money abroad. Only last year Ukrainians obtained 34 706 e-licenses, primarily for the acquisition of securities of multinational corporations. Here’s what we get by making simple math: 34 706 multiplied by $50 000 (maximum transferable amount) - it turns out that the economy lost $1 735 million. This excludes transfers for financial allowance and other purposes. Can you imagine how much this money could benefit the country as a whole?
Ukraine is virtually cut off from the global capital market.

Let's take a look at the numbers: how much money can Ukraine's budget derive?
We could go into detail with statistics and examples, but let's first analyze the nature of stock market capitalization and what it means for the country. On international stock exchanges, 12 national corporations with a total capitalization of $5 billion are listed. This demonstrates that Ukraine's capitalization to GDP ratio in 2020 is 3.59%.

Or if we take this figure and average it across two of our neighbors - Poland and Russia - we discover that corporate capitalization in Ukraine might reach 40% of GDP in 2021 (as per estimates it will be $170 billion). Considering that the percentage of the allocated shares is roughly 25%, which is equal to the amount that goes to the account of the companies listed on the stock exchange, on average, we get the following calculation: $ 170 billion * 40% * 25% - makes capital flow of at least $ 17 billion, however de facto it can range from $ 17 to $ 30 billion.

Let us now assume that our economy received $30 billion in direct investment. What benefit would it have on the economy in terms of strength and growth? It is safe to say that the investment resource has the potential to enhance the economy and citizens' well-being by 10% for several years running.

Perhaps our previous calculations are too optimistic. However, let's compare data from all the neighbouring countries. The table below shows the stock market's share of GDP.


Based on three years of data, the average stock market percentage of GDP in those countries is 21.68%. Extrapolating the received data to Ukraine gives the following results:
●      Ukraine GDP in 2020 - $142 billion, potential capitalization - $30,8 billion.
●      Ukraine GDP in 2021 - $170 billion, potential capitalization - $36,8 billion.

Conclusion:
Based on current data, the Ukrainian economy as a whole, and business in particular, are both undervalued by at least ten times. Market capitalization is a viable option for Ukraine to attract billions of dollars into its national economy. The establishment of a diversified stock market and its integration into the worldwide finance system will encourage direct investment into the country and serve as a source of growth and development for numerous enterprises.

The purpose of this analysis is to enhance corporate and government awareness of stock market instruments and the establishment of capitalization that is equivalent to the enterprise's value. All we have to do is tap into the source of prosperity that is right around the corner. To accomplish this, the government and issuers must collaborate to overcome the credibility crisis, develop and deploy stock market instruments, construct infrastructure, and address legislative gaps.

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