Q Banking sector reform seems to be progressing well. What are the main changes that have been implemented?
A This is the fourth year of rapid economic growth and over this period GDP has risen by an average of 7.4% a year, industrial output by 12.3%, industrial fixed investment 18.5% and household real income by 11.3%.
The banking sector has been catching up with the economy. The increment of banking sector capital is 31%, banks’ assets are rising 40% a year, while liabilities rose 45% a year. This means deposits in banks have increased five-and-half-fold.
If you take the same numbers since the start of this year, the growth has been even greater – 11.5% GDP growth over the first quarter – and the banking system is growing at the same pace, while we have held back inflation, so we can be pleased with our results.
Q Thanks to this growth banks are lending as fast as they can to meet massive demand for capital. Is there a danger that bankers will get carried away and risks will be forgotten in the euphoria?
A We are conscious that there are risks from the growing lending. But in Ukraine we have several advantages. Over the past three years we have had a balanced budget as well as a trade surplus. In addition we have had low dollarisation – lower than in other countries in the region. These factors are a strong basis and help to guard against crises.
We have developed strong monitoring of the transparency of the banking sector, especially where lending is concerned. All Ukrainian banks are audited in compliance with international auditing standards.
Q Retail banking is booming – how does this relate to the introduction of a limited deposit insurance scheme?
A During the past few years, we have seen trust grow between the population and the banking system, and the constant rising deposits are the evidence.
We have a deposit insurance scheme that covers Hrv3000 [of deposits] but we are working to increase this to Hrv5000 ($967) by the end of the year. Given the level of deposits and credits in the country, we believe this will be an optimum ratio because if we considerably increased the coverage then this could result in weaker risk assessment by the population when choosing a bank.
Q Household deposits are one source of long-term capital but typically timed deposits are for no more than a year. What can be done to increase the long-term resources?
A Banks cannot lend for 10 years if they only have one-year deposits. Again the key issue is the level of trust between the people and the banks – trust in the banking system and in the national currency.
Here we have a lot of room for development. Our banks have already started to look for loans on the international capital markets. Two Ukrainian banks recently placed Eurobonds for $100m each over a longer period of time. But reform of the Ukrainian insurance markets, especially life insurance, and pensions is still needed. We are planning to set up a three-tier pension system and work has already begun.
Q What is your monetary policy? The hrivna has been stable recently and the gross international reserves have been increasing strongly. Does this impose inflation problems?
A We can issue deposit notes and intervene on the foreign exchange market, and these two instruments worked pretty well in controlling prices in the past two years: inflation was only 6% when the predictions were for9.5%-10%. The net international reserves have grown by 200% in the past two years and we have three months of import coverage.
Q The economy is growing strong and bank reform is well in hand, successes that have been reflected in Ukraine’s improved credit ratings. Do you expect to reach investment grade rating soon?
A I think that the ratings will seriously increase when the upcoming presidential election campaign is over. These are political risks that are holding back investment.
Political risks exist here as in any other country, but I think foreign investors overestimate them. The economics of Ukraine are liberal. The private sector is strong. There is still need for structural reform and there is corruption. We still need tougher laws to enforce property rights and we need to deregulate our economy. But if we are successful in dealing with all these problems, then this will be to our benefit.
