Emerging Markets In-Depth takes a closer look into the economic situation of individual countries. This time we explore Ukraine with the perspective of a private bank.
The political situation in Ukraine is notoriously unstable since becoming an independent state after the dissolution of the Soviet Union in 1991. Ukraine made the painful transition to a market economy only to be hit by the economic recession of 2008 along with the rest of the world. In recent years the instability has been aggravated by the suspension of an association with the European Union in 2013, and the Russian incursion into Crimea and Eastern Ukraine in 2014.
On top of all this, Ukraine’s current President Poroshenko was recently linked to the infamous Panama Papers alleging offshore holdings and tax dodging. IMF Chief Christine Lagarde warned Poroshenko that he risks losing the $17.5 billion bailout. “Without a substantial new effort to invigorate governance reforms and fight corruption, it is hard to see how the IMF-supported programme can continue and be successful,” Lagarde said in Reuters.
Economically, the National Bank of Ukraine (NBU), the state bank, has hardly made things easier for the commercial institutions of the country to operate successfully in these difficult times. The largest commercial banks have borne the brunt of the NBU’s wrath in the form of unnecessarily stringent regulations for Capital Asset Requirements (CAR) and fluctuating stress tests guidelines.
The new CAR by the NBU have shrunken the loan portfolios across the banking landscape. Banks with foreign capital are now buying government bonds and the clients do not receive the funds; banks with Russian capital are shrinking assets due to the political climate; and state-owned banks are loss-making due to their lack of innovation and inability to cope with overdue loans.
In the last two years, private banks have seen an outflow of deposits almost double the refinancing loans given to them by the NBU amounted to - they are being forced to cover more than 50 per cent of deposits outflow with their own liquidity.
A decrease in the interest rate under the NBU refinancing loan would be a good start to fix the situation. Just recently private banks paid UAH 650 million for the principal of the loan and accrued interest of UAH 514 million. The largest commercial banks in Ukraine are struggling to keep up with the high interest rates and relentless deadlines.
The stress tests in 2014 were conducted by a third-party firm, KPMG, and according to International Financial Reporting Standards (IFRS). In 2015, however, the NBU conducted their own, shutting out the impartial third-party auditors and neglecting IFRS procedures which call for standards such as corporate rights included as eligible collateral.
The result of which require institutions like private banks to re-register their corporate rights into hard collateral and revise loan terms to even higher interest rates.
The requirements put in place by the NBU are not based on any current regulations, let alone internationally agreed upon standards such as the IFRS. As a result, the shareholders are being forced to take responsibility for the largest loans.
“Ukraine’s economic and political challenges do not explain or justify the actions by the National Bank of Ukraine that are actually exacerbating rather than alleviating the country’s problems,” said Stan Collender in a recent piece in The Hill.
In order to stabilize the current economic situation, the NBU should review stress test results and base the tests on accepted regulations in partnership with outside auditors. By allowing a more fair and open stress test process, along with lower interest rates on refinanced loans, the NBU will help Ukraine out of the economic hole it finds itself in, rather than continue to dig it deeper.