Ukraine: Breaking Through the Perfect Storm 34th Meeting of the Central Bank Governors' Club of Central Asia, Black Sea Region and Balkan Countries 26 Sep 2015, Tbilisi
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Ukraine went through the perfect storm in 2014-2015 3 Bank run Interest rates spike Credit crunch Mounting NPLs Capital shortage Disastrous corporate governance Banking crisis Macro crisis Severe growth recession Hiking inflation Sharp drop in exports Widening budget deficit 1 2 Currency crisis Wide BoP deficit Severe confidence crisis FX and capital controls Multiple exchange rate practices amid flourishing black FX market This is not the unique situation in Ukraine: Mexico (1994/95), Argentina (1994/95); Thailand (1997), Indonesia(1997), Malaysia(1997), Philippines(1997); 3 Russia (1998); Brazil (1999/1999); Turkey (2001);
02.06.2014 10.06.2014 17.06.2014 24.06.2014 02.07.2014 09.07.2014 16.07.2014 23.07.2014 30.07.2014 06.08.2014 13.08.2014 20.08.2014 28.08.2014 04.09.2014 11.09.2014 18.09.2014 25.09.2014 02.10.2014 09.10.2014 16.10.2014 23.10.2014 30.10.2014 06.11.2014 13.11.2014 20.11.2014 27.11.2014 04.12.2014 11.12.2014 18.12.2014 25.12.2014 06.01.2015 14.01.2015 20.01.2015 27.01.2015 03.02.2015 10.02.2015 17.02.2015 24.02.2015 03.03.2015 11.03.2015 18.03.2015 25.03.2015 01.04.2015 08.04.2015 16.04.2015 23.04.2015 30.04.2015 08.05.2015 18.05.2015 26.05.2015 03.06.2015 11.06.2015 18.06.2015 24.06.2015 02.07.2015 09.07.2015 16.07.2015 24.07.2015 31.07.2015 07.08.2015 14.08.2015 30 Administrative measures were used to ward off the panic at FX market Exchange rate, UAH/USD 30.01 25 23,09 22,07 20 15 13.53 15,19 10 Administrative measures 5 0 The National Bank of Ukraine has developed a phasing-out plan for gradual liberalization conditioned upon sustained improvements on FX and money markets Source: NBU
Liberalization of FX administrative measures introduced in 2014-2015 Stage I The NBU and the IMF developed the FX market liberalization roadmap Stage II Stage III Stage IV Apr. 2015 Sep.2015 apx. Mid2016 Roadmap is condition-based Conditions for the I stage were: Government debt restructuring Banks capital increase based on the diagnostics 2014 results International reserves increasing Full transition of Naftogaz to the interbank market for its FX purchases NBU also plans to introduce FX market liberalization in general by amending Ukrainian legislation
Situation in the financial sector in 2014 required radical reforms Insufficient capitalization of the financial system High dollarization Low corporate governance level Large number of inefficient financial institutions Poor creditor rights protection Lack of transparent reporting from financial sector players Ceased lending to the economy High level of lowquality assets Low financial literacy of population Lack of capital market Low level of supervision Lack of confidence in financial sector Financial sector has a great number of issues piled-up, which have to be addressed for further efficient development
The financial sector reform implementation provides for three key stages І. Resolving the problems of the past (CLEANING-UP) - Clean-up of banking sector - Banks recapitalization - Disclosure of beneficial owners - Related party loans unwinding ІІ. Laying the foundations for sustainable development (RELOADING) - Protection of creditors, consumers and investors - Restoring confidence - Development of infrastructure - Pension reform ІІІ. Developing the financial sector - Growth of long-term resources - Growth of assets - Increase in number of domestic and foreign investors - Development of the capital market 2014 2015 Today 2016 2017 2020
Disclosure of the Ukrainian banks beneficial owners NBU prohibited suspicious buyers to buy a bank 45 times JANUARY 2015 SEPTEMBER 2015 27% Disclosed ownership structeres Not disclosed 2% Disclosed ownership structures Not disclosed 73% 98% + 25% disclosure rate 73% 98% 14 banks are officially deemed non-transparent They have to disclose their beneficiary or would be withdrawn from the market National Bank continues to work on ensuring the banking system transparency
Cleaning-up of the banking sector Clean-up of the banking sector 2014 2015 180 banks 122 banks Compliancebased approach Banking supervision and inspection Risk-based approach 35 banks underwent stress-testing in 2014 18 required 13 recapitalization at banks UAH 66 bn fulfilled conditions
Banking system diagnostics 2015 TOP 20 banks diagnostics DR TOP 10 banks capital increase TOP 20 of banks capital increase TOP 10 banks analysis Top 10 RPL reduction plans RP TOP 20 banks analysis TOP 20 RPL reduction plans Other banks analysis Other banks RPL reduction plans 2015 Oct. Nov. Dec. Jan. Feb. Mar. Apr. May. Jun. Jul. 2016
Legislative amendments Modification of some acts of Ukraine concerning terms of return of term deposits" (Law No. 424-VIII) The new requirements to the bank ownership structure (NBU Board Resolution No.328) 7 laws expected to be adopted at this Parliament session, incl.: Approval of the regulation on definition of the bank s related persons (Resolution No.314&No.315). Legislative amendments Strengthening the responsibility of the bank s associated persons (Law No.218-8) The system-based banks' methodology for defening and regulating (Law No.629-8) Amendments to the Regulation On Banks Registration and Licensing (Resolutions No.357 and No.368)
The National bank transformation 2 New streamline organization structure Define the Mandate Non-core functions out 1 Supervision Monetary stability Market operations Transactions Finance and administration Governor functions Board Directorate Division 3 Reducing hierarchy levels Department 5 Regional offices optimization 4 Functional centralization via Divisionalisation 6 Rightsizing 7 Processes reengineering
New organization structure of the NBU focused on core Central bank functions NBU council Audit #1 Governor Legal Communication Secret service HR Supervision Monetary Policy Market operations Cash & Settlements Finance and administration Banks supervision Monetary policy Open markets Cash operations Accounting Banks inspections Finance stability Loan administration Payment systems Financial controlling Monitoring of related parties Financial monitoring Registration & Licensing Risk department Statistics & Reporting Depositary Transactions & Settlements Operations IT IT security Strategy and transformation Logistics & Procurement Regional offices International affairs Methodology Security #2 #3 #4 #5 #6
I.2013 II.2013 III.2013 IV.2013 I.2014 II.2014 III.2014 IV.2014 I.2015 II.2015 III.2015 IV.2015 I.2016 II.2016 III.2016 IV.2016 I.2013 II.2013 III.2013 IV.2013 I.2014 II.2014 III.2014 IV.2014 I.2015 II.2015 III.2015 IV.2015 I.2016 II.2016 III.2016 IV.2016 Economic rebound is expected from 3Q2015 60 55 50 45 40 35 30 CPI Growth Forecast, % yoy 25% 50% 75% 95% 110 105 100 Real GDP Forecast, Q1 2010=100 (seasonally adjusted) 25 20 15 95 25% 10 5 0-5 90 85 50% 75% 95% confidence interval Source: NBU Source: NBU We expect gradual economic recovery to start in 3Q2015 with real GDP resuming growth and inflation falling to low double digits in 2016. But the risks to the baseline scenario are tilted to the downside Ukraine faces high risks related to escalation of the military conflict in the Eastern Ukraine and political instability (i.e. government reshuffle)