Business in Ukraine

If at the end of summer, it was possible to buy one dollar for 4.7 hryvnia, then on October 8^th, the exchange rate surged up to 6.0 hryvnia for one dollar in some exchanges. This shows that hryvnia has lost more than 20% of its value over the past incomplete one and a half months.

After its extraordinary meeting on Tuesday, the Board of the National Bank of Ukraine (NBU) made an announcement concerning expanding its forecasted corridor for hryvnia’s exchange rate fluctuations – from 4.85 hryvnia for one dollar (plus/minus 4%) to 4.95 hryvnia for one dollar (plus/minus 8%). When commenting on this decision, the head of the Board of the National Bank, Petro Poroshenko, tried to insure Ukrainians that there are no reasons for hryvnia’s devaluation and no problems with the liquidity of banks.

However, how can we believe in this if the same night, the Board of the NBU extended a five billion credit line to PromInvestBank, one of the largest operators of the Ukrainian financial market, and decided to establish a temporary administration in the bank as well as announce a moratorium on savings withdrawal? Some mass media assumed that bankruptcy of PromInvestBank might threaten other financial institutions…

The entire banking system of our country, which until recently displayed a surprising immunity to global financial crisis, virtually turned out to be under threat of replication of the 2004 scenario. After a series of multi-billion interventions, the NBU actually managed to lower the exchange rate of the hryvnia. Friday’s trading at the interbank foreign currency exchange closed with a quite comfortable rate of 5.2 hryvnia for one dollar. First deputy chairman of the NBU Anatoliy SHAPAVALOV gave ZN his comments on the recent events in the country’s financial market.

— Anatoliy Vasyliovych, what caused the recent surge of the dollar’s exchange rate in commercial banks’ exchanges?

The currency exchange market appeared under the influence of a number of factors, which, by the way, were mentioned the other day by the chairman of the NBU. The first factor is a decrease in the inflow of foreign currency from exports due to a decreased demand for national metallurgical and chemical products in the foreign markets. The second is the influence of seasonal factors: seasonal increase in the citizens’ demand for foreign currency, more intensive purchasing of energy supplies and advanced payments within international contracts.

And the third factor is considerable aggravation of access for the national financial institutions to resources in foreign markets due to the global financial crisis at the time when they have to buy foreign currency to pay off their loans received earlier.

As you know, the Board of the NBU considered the current situation and widened its forecast of exchange rate fluctuations (from 4.85+/- 4% to 4.95 +/-8%, or 4.55 – 5.35 hryvnia for dollar). I consider this step to be reasonable. However, I would like to emphasize once again that the issue is not about the devaluation of the hryvnia. It is a correction of the exchange rate forced by the current circumstances.

— Do the aforementioned factors justify an instant surge of the quotations in the exchanges up to 6 UAH/USD? If not, then why did the National Bank allow this to happen?

— Apart from the abovementioned, a number of other factors in both domestic and global markets affected the situation. The global markets were consumed with panic after the news about the downfall of Germany’s largest mortgage bank, Iceland’s banking system being in the prior to default state and bankruptcies of the Russian banks.

In addition, a conflict around PromInvestBank has suddenly escalated in Ukraine. It is a quite longstanding conflict but, the mode it has finally entered is an unpleasant surprise to us.

Certainly, all these events had a strong but mostly (90%) psychological impact on the domestic market that made bankers and depositors feel nervous. I would like to emphasize that none of the significant changes in the economy justifying such surges of the exchange rate could occur during just one week. Outflow of speculative capital from the Ukrainian stock market estimated around UAH 300 million is no serious threat.

— Speaking of PromInvestBank: Do you agree with the statement that the bank became a victim of a raider’s attack or was it the fault of the bank’s main stockholders?

— So far, it is hard to definitely assert who is responsible – stockholders or raiders. However, when flyers and SMS’s with a message “the bank is bankrupt, withdraw your money as soon as possible” appear, the depositors can hardly stay calm. And PromIvestBank had more than 4 million depositors. The customers rushed to the bank and withdrew more than UAH 3 billion in a few days.

What bank is able to withstand such a situation independently? In just one day before the temporary administration was instituted, the bank lost more than UAH 1 billion. A full-scaled customers’ panic was obvious. The only way to save the bank was to establish a temporary administration and announce a temporary moratorium on paying out the deposits.

My opinion is that we will manage to return back the deposits and rescue the bank. It has good high yielding assets. PromInvestBank’s profit during the last eight months was about UAH 500 million.

— Was it not possible to forecast such an excess situation? Wasn’t the National Bank too optimistic by being unprepared for this?

— You shouldn’t put the question this way. We have forecasted the development of negative scenarios in the global markets and began to implement preventive measures starting in May last year. The banks actively working with nonresidents’ money were the key objects of attention then.

The next stage of our preventive work was a considerable restriction of our credit and monetary policy this year which resulted in a rise of interest rates in the interbank market up to 25-30%. The rates stayed at this level for almost two months.

At first, the Nation Bank evoked a wave of criticism for these actions. However, afterwards, many bankers even thanked us for forcing them to review their market policy and approaches to liquidity management.

— What is your estimation of the current liquidity of the banking system?

— The National Bank pays a lot of attention to issues connected with the liquidity of the banking system. Last summer, we have resolved to carry out an easier monetary and credit policy, supporting the level of quick ratio between 6 and 8 billion.

Due to these measures, it was possible to provide a necessary balance. Neither the crisis in the global markets along with the news about bankruptcies, injections and nationalizations, nor the internal political conflicts with the, to put it mildly, incautious statements of some politicians could cause serious shocks in the domestic financial market. On the other hand, the monetary policy we conducted was moderately restrictive which helped slow down the growth of monetary aggregates and reduce the amount of consumer loans.

From the beginning of October, balances on the banks’ loro accounts have surpassed UAH 20 billion, and from Wednesday – UAH 21 billion, UAH 12.9 billion of which are obligatory reserves. Thus, disposable money is more than UAH 8 billion. We have also sterilized another UAH 5 billion as an additional buffer. Therefore, we have a surplus liquidity in the banking system today. However, there is not enough trust between the bankers.

We tried to assure the bankers: “You see each other perfectly well; you monitor each other’s balances on a daily basis. The situation is quite stable. Start working: insure yourselves, secure yourselves, but start lending.” They promised: “Yes, we will.” However, they prefer to be overcautious.

Both Volodymyr Stelmakh and I asserted that liquidity of the banking system is high enough, that we are ready to refinance and support good banks with high yielding assets in current conditions of aggravated access to the foreign markets.

We are operating in a normal mode and are employing traditional banking instruments. It was a scheduled and not an extraordinary trading on Wednesday, during which we extended UAH 1.66 billion refinancing to twenty one banks. Some time earlier, we extended an ordinary loan to Nadra Bank (not extraordinary, as many mass media asserted) for its refinancing purposes. Under the current circumstances, using the received refinancing to redeem its external debt would be more profitable for the bank.

Unfortunately, the media misrepresents information quite often, causing additional worries in the market and among the citizens.

— Anatoliy Vasyliovych, perhaps, you are not active enough, are you? You seldom conduct meetings with the bankers or you are not convincing enough, are you?

— We are able and are ready to hold meetings with the bankers. However we didn’t consider it necessary to put them off their direct work since the liquidity in the interbank was high enough, which was proved by the rates at the level of 3 to 7%.

Besides, consultations with representatives of the largest operators are constantly being held anyway. We examine and analyze their proposals. We consider some of the proposed measures to be quite reasonable and some premature and inexpedient. For instance, many banks proposed limiting a permissible margin for fluctuations of the exchange rate in the exchanges that work with cash.

Our experience shows that this measure is inefficient and leads to a deficit and the appearance of shady exchanges. And it is extremely hard to account the volumes of such illegal operations. Therefore, this measure does not solve the problem but creates additional difficulties.

By the way, I would like to note in this context that I don’t understand those bankers who for the sake of a three cent profit are ready to provoke their own customers to withdraw their savings.

— Doesn’t the inaction of the National Bank that allowed the dollar’s exchange rate to surge up to six hryvnia provoke worries among the citizens?

— The leadership of the National Bank has already announced that it is ready to support the foreign currency exchange market with currency interventions. Yesterday and the day before yesterday [this interview took place on Thursday night October 9^th – Yu. S.], we have already proved our announcement by selling 175 million dollars and 475 million dollars for 5.0 UAH/USD. We are going to enter the market on Friday if it is necessary to calm down roaring demand. My opinion is that we will able to lead the market to a rational exchange rate, close to the official rate, in the near future.

— Do you mean a 4.8 - 5.0 UAH/USD range for exchange rate fluctuations, which, according to Volodymyr Stelmahk, is possible considering an objective estimate of the current economic situation in Ukraine?

— It is possible that the exchange rate will be higher than that for some time since the correction of the rate should compensate the influence of seasonal factors and lower the impact of aggravated export conjuncture. These as well as other possible misbalances are what the National Bank is trying to accomplish by liberalizing the process of exchange rate formation.

— What is the most optimal exchange rate in your opinion?

— My opinion is that it should be 5.10 UAH/USD

— How soon will the market achieve this point?

—It depends on many factors including the development of the situation in the global markets. A number of leading central banks have already lowered their discount rates.

As far as we know, the International Monetary Fund is now discussing the possibility of extending credit lines within insurance stand-by program to developing countries with negative foreign trade balances in order to prevent possible financial shocks. After an agreement on this matter is concluded, it will be possible not to use these resources. However, if problems occur, it is possible to receive them immediately. We plan to propose considering this possibility on Friday’s meeting with the President.

Tags: Finance //