“From the outside you might not be able to see the reform that’s taking place on the inside,” she said, “but we’re changing all the technological processes with the assistance of the Canadian central bank.”
Changing the banking sector
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The NBU’s bank-reforming policy with a 2020 deadline, which includes European Union recommendations and suggestions by the International Monetary Fund, focuses on cleaning the system of insolvent banks, among other things, added Gontareva.
She intends to fight the current high interest rates with market methods. “There shouldn’t be any banks that don’t care about the interest rate for attracting money.”
Banks are prescribed to cross the $40 million threshold for shareholder equity during next 10 years, but this cannot be done through borrowing money from the central bank, as it provides liquidity, not inputs into equity.
Conducting banks’ asset quality review is a part of the IMF-backed reform agenda. The fifteen biggest Ukrainian banks have already gone through a review and have not revealed any substantial problems, according to Gontareva. Now it’s the turn of the second group of 20 big banks. These 35 banks represent 80 percent of the country’s banking system. The World Bank’s $500 million loan will be used to deal with insolvent banks, with a substantial part of the money allocated to a Deposit Guarantee Fund.
Russian commercial banks, which occupy 13 percent of the Ukrainian market, are under special monitoring, since those backed by the Russian state – Sberbank Rossii, Prominvestbank and VTB – are experiencing significant deposit outflow in Ukraine amid the EU’s and U.S.’s sanctions restricting their access to global capital markets. “If Russia is going to act absolutely inadequately – we are going to introduce the relevant measures. Moreover, we have a law for doing that,” explained Gontareva.
IMF program
The nation’s central bank policy includes sustaining relations with the IMF, the Washington D.C.-based global reform-oriented lender that approved a $17 billion aid package in a 3-percent 2-year loan on May 1. However, on Aug. 29 the IMF, led by France’s Christine Lagarde, will reassess the program, as Ukraine’s ongoing crisis caused by Russian aggressive policy involving Crimea and the Donbas is harming the country’s economy severely – it contracted by 4.7 percent in the second quarter year-on-year with the central bank’s reserves shrinking to $16.1 billion.
The Fund’s has already lowered its forecast on Ukrainian gross domestic product by 1.5 percentage points to 6.5 percent shrinkage this year, with the government sticking to this figure in planning its macroeconomic policy.
Inflation targeting
Another IMF recommendation is inflation targeting, a central bank policy aimed at setting the prospective inflation rate via monetary measures. “It will take 12-18 months for us to get ready for implementing inflation targeting,” said the NBU governor.
This year Ukraine’s inflation is expected to reach 17-19 percent, according to the central bank forecast, which is critically high even by emerging market standards.
Regulating the money supply through selling and purchasing government bonds is a key inflation targeting instrument, which is the reason why central bank’s Gontareva plans to develop the domestic bond market – the one she dominated as founder and head of Investment Capital Ukraine, country’s major bond dealer.
“We don’t want the NBU to keep 70 percent of government domestic bonds in its portfolio,” she said, ironically calling this a “Ukraine-style QE”, or quantitative easing, a central bank policy aimed at pushing more cheap money into the business sector through low interest rates and repurchasing domestic bonds from the market, encouraging investors to place more capital in more risky, but yield-rich corporate bonds, credits and equity to boost economic growth.
Meanwhile, Ukraine’s corporate bond market remains illiquid, while companies prefer to borrow money from banks, which is opposite to the bond-centered U.S. corporate debt market, but very similar to the EU one. Moreover, Ukrainian companies – with the agriculture sector’s voice as one of the strongest – complaining about banks’ high lending rates.
“Unless the government bond market develops, which we want to see in a year, the corporate bond market will be dominated by technical issuances, reflecting the spreads for commercial risks,” Gontareva comments.
Currency
Regarding the currency issue, the IMF’s aid program was seen by many as a restriction on the NBU’s currency-strengthening actions on the interbank market, since a free-floating currency is one of the key changes suggested by the IMF.
However, Gontareva admits that the NBU will be intervening on the interbank market in order to prevent panic, while Ukraine’s financial sector has a long track record of irrational behavior – one of the reasons for the hryvnia’s 35-percent drop in value this year.
On Aug. 5 the regulator sold $69 million to commercial banks to stop the growing panic that arose as a result of the crisis in the nation’s eastern region, while on Aug. 8 it started offering dollars again with the price lower than the market one.
Stanley Fischer’s lamentations
Stanley Fischer, vice chair of the U.S. Federal Reserve and former governor for the Israel’s central bank, lamented Gontareva’s challenges as she has to lead the central bank of a nation experiencing the undeclared war with Russia, military experts categorize as “hybrid” due to using the guerilla tactics combined with a massive propaganda.
“He told me that he has never had to deal with such incredibly complicated issues. In Israel, they always had a special fund for military purposes,” Gontareva revealed after her last trip to Washington D.C.
She took the central bank office from Stepan Kubiv, EuroMaidan activist with a background in banking, on June 19.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
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