NBU Deputy Governor Dmytro Solohub: Most of IMF requirements for a new program have been met. And work on prior actions that have not yet been completed is almost finished
Lending rates in Ukraine are several times higher than those in European countries. NBU Deputy Chairman Dmytro Solohub sat down with UNIAN to tell about the reasons for such pricing by banks, the likelihood of cheaper loans, and the impact of the coronavirus epidemic on the national economy.
Ukrainian authorities speak of the need to accelerate economic growth, with the ambitious goal of rising 40% in five years. It is clear that the existing annual GDP growth rate of about 3% is negligible for a tangible improvement in the well-being of Ukrainian citizens. In order for new jobs to emerge in Ukraine, and wages and social standards to actually increase, the pace must be at least twice as high.
The Ukrainian economy needs large-scale financial injections to accelerate. Foreign investors are not in a hurry to invest money in our country due to the investment climate which is not enough favorable. Therefore, the only hope for accelerating growth is bank lending, which last year declined in almost all segments except consumer lending.
How does lending affect the economy? Suppose a young family has got a mortgage loan to buy an apartment. In this case, in addition to meeting the needs of the individual family, the income will be received and taxes will be paid by the developer and the creditor bank. Or, if an entrepreneur gets a loan to open a coffee shop, this will allow them to get income and pay taxes for themselves and their employees. If a large company repairs its equipment using credit money, it will be able to increase production and revenues and, again, pay more taxes. And so the circle goes.
Meanwhile, there aren't many willing to get loans in Ukraine as they are too costly. Even after a rather significant decrease in rates by banks last year, average rates for businesses are about 15% per annum, for mortgages - about 20%, for consumer lending – about 33% per annum. Comparing these rates with those of neighboring European countries, Ukrainian borrowers overpay on loans three to five times.
To find out why lending rates in Ukraine are still so high if they can decline to an acceptable level, and whether there will be any significant impact on the national economy by the global coronavirus epidemic, UNIAN spoke with Dmitro Solohub, Deputy Governor of the National Bank of Ukraine.
When will lending rates in Ukraine be reduced to the level of European countries? Is it even possible?
Lending rates depend on the value of the deposits and the margin. Margin, in turn, consists of various components, including the cost of funding, cost of risk to the bank, and administrative costs. There are two main components – deposit rates and cost of risk.
The deposit rate is always determined by the inflation rate in the country, the overall macroeconomic stability. For example, if there is more than ten percent inflation in the country, the deposit rate may not be five percent. In Eastern Europe and the European Union, deposit rates are very low as inflation is low, too.
The second component is the cost of risk, which depends, among other things, on the state of the judiciary. When a bank lends, it immediately imposes a certain probability of default. Due to the many years of the negative experience of unsuccessful recovery of debts from borrowers who would re-issue collateral and evade paying off debt, the cost of risk remains high in Ukraine.
A normal and effective judicial system is observed in the EU countries. And banks understand that if a loan is not repaid by the borrower, there is collateral, there's court, and a bankruptcy proceeding through which the loan can be repaid.
Thus, the reduction of credit rates in Ukraine depends on the reduction of inflation and the transformation of the judicial system. And above all, the value of resources is important, because, without it, loans will not fall in price.
How many years of stably low inflation will it take to cut lending rates significantly?
We have already stabilized inflation at a low level of around five percent, but this is still higher than that of the EU, as our economy is growing faster. If the economy grows faster, it generates higher inflation. This is a normal situation.
Ukraine is currently undergoing changes that are already behind in developed European countries. With stable low inflation in the next two to four years, one can expect a decrease in deposit rates, probably up to six-seven percent, and on loans - to a single level.
The average cost of resources for banks is already unambiguous, as apart from retail deposits there are current customer accounts and corporate deposits at which rates are lower. The cost of resources will continue to decline. When the NBU's discount rate is seven percent and inflation is five percent, the rates will obviously be lower than they are now.
Why did the National Bank choose a five percent inflation target? Perhaps to stimulate lending it is necessary to reduce it, for example, to two percent?
It is necessary to choose an indicator that corresponds to the situation in the Ukrainian economy. Choose not the level we want, but the optimum indicator. Most countries in the world that have a successful history of declining inflation have reached two to three percent. Ukraine will follow this path. But it is too early to lower the target after the previous goal was only one year old.
The economy is undergoing structural changes that began in 2015-2016. Last year's revaluation of the hryvnia became the first such episode in the history of Ukraine. Economy options are changing. These trends need to be analyzed and early steps avoided.
It is possible to revise the target in the future, but I cannot say exactly when it will be. If there is low inflation in the world, it is clear that in two or three to four years we will reach the target. But only if inflation in the country remains at a stable low level and in the presence of normal rates of economic growth.
At present, the target is similar to that in Turkey, but their actual inflation is much higher. In some post-Soviet countries - Georgia, Armenia, Russia - the target is lower.
The National Bank recently announced a new instrument for stimulating lending - the interest rate swap. What is the essence of this tool and how will it help banks?
Bank deposits generally have a maturity of up to one year, while loans have two to three years or more. When a bank lends, it fixes the rate for several years, but deposit rates can change several times during this period. Therefore, banks are exposed to interest rate risk, which impedes long-term lending. An interest rate swap will allow banks to set a rate and avoid interest rate risk. Bids have been declining so far, but this trend may change. Declining inflation is behind us and we are entering a different period.
What can be done to encourage customers to place deposits for longer?
This is a matter of macroeconomic stability, confidence in the banking system. Gradually, the terms of deposits are extended. But it should be noted that a swap and floating rate are standard market instruments in the world. There are also no ten-year deposits in other countries. They are mainly placed for one to two years.
Can you comment on the situation on the government bonds market, where the volume of placement fell significantly and after a long decline the rates increased?
This is a matter for the Ministry of Finance. But in my opinion, this is a normal market situation. The market goes through different phases - high rates change low and vice versa. The market is looking for balance. Similar processes occur in the foreign exchange market - the rate is moving in different directions, volumes are changing. It is a standard market process driven by supply and demand.
Regarding the pressing isseu, the coronavirus: the NBU has repeatedly stated that this situation will not have a significant impact on the Ukrainian economy. But, for example, there was a statement about the daily loss of Russia's economy due to this factor of about a billion rubles. As in Russia, China is our country's largest trading partner. How much is our economy losing?
If we analyze the Ukrainian currency market, we still do not see any effect. There has been a fall in the global financial markets, but they have already played down. For example, the profitability of Ukrainian eurobonds has declined again after growth. Prices for Ukrainian imports have declined substantially. For example, oil has fallen ten percent since the beginning of the year. At the same time, export prices have declined slightly.
There is also no effect on demand indicators. Ukrainian exporters supplying products to China have not reduced their revenue. There were some problems with logistics, but now they are solved. More than half of our exports to China are grain, food, and meal. Demand for these products has not decreased either from China or the world market. In my opinion, this situation had a short-term effect. There may be some impact in the future, but globally we do not see any problems for the Ukrainian economy.
The International Monetary Fund's mission is currently operating in Kyiv. What are the expectations of this mission: will we finally get a new program, or is it an intermediate stage of dialogue?
This is the usual standard dialogue with the IMF. All program parameters are clear, the previous steps that Ukraine is expecting from the Fund to announce a new cooperation program are approved by the Board of Directors. We are working in this direction. During the visit of the IMF mission to Kyiv, representatives of the Fund met with a number of government agencies, including the NBU. During the meeting with representatives of the Fund at the NBU we discussed the usual issues: economic growth, inflation dynamics, monetary policy, the state of the banking system. There were no new questions. In the IMF, we have no questions at all: the National Bank pursues monetary policy goals.
As you know, at the technical level, an agreement has already been reached on an extended three-year funding program. Ukraine has complied with most of the IMF requirements for the new program. And work on the steps that have not yet been completed has almost come to an end.