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Challenges for monetary
policy and financial stability
Sergiy Nikolaychuk
Director of Monetary Policy and Economic Analysis Department
85th East Jour Fixe of the Oesterreichische
Nationalbank in cooperation with the National
Bank of Ukraine
12 September 2019
Monetary policy is committed to bring inflation to 5% target
Headline CPI, % yoy
Source: NBU Inflation Report, July 2019.
0
2
4
6
8
10
12
14
16
18
IV.16 II.17 IV.17 II.18 IV.18 II.19 IV.19 II.20 IV.20 II.21 IV.21
Tolerance bands Target CPI
ForecastMonetary policy
horizon
2
… via monetary conditions consistent with planned disinflation
3
0
4
8
12
16
20
IV.17 IV.18 IV.19 IV.20 IV.21
30%
50%
70%
90%
confidence
intervals
Key rate (%) and uncertainty
Source: NBU Inflation Report, July 2019.
Tensions in the financial sector are gradually declining
4
Financial Stress Index
0,0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
05.08 11.08 05.09 11.09 05.10 11.10 05.11 11.11 05.12 11.12 05.13 11.13 05.14 11.14 05.15 11.15 05.16 11.16 05.17 11.17 05.18 11.18 05.19
Lehman Brothers bankruptcy
Outset of crisis in Ukraine
IMF-sponsored anti-crisis laws
Unrests on Hrushevskogo
str., KyivPresidential elections in
Ukraine
Escalation of military
Switch to flexible FX rate
Launch of talks on Ukrainian
external debt reprofiling
Agreement on reprofiling
or external debt
Privatbank
nationalization
Worsening EU debt crisis
Initial agreement
on IMF terms
Insolvency of Delta bank
Russion armed agression
in the Kerch Strait
Source: NBU.
Risk map for banking sector
Credit risk (const). Debt burden on households isrelatively low. New consumer loans are of better quality.Credit risks of corporate sector are slowly subsiding,banks lack high-quality borrowers.
Capital adequacy risk (const). Sector is adequatelycapitalized for an eventual crisis. Capital adequacy ratioat two SOBs is close to minimum requirements. Dividendpayouts are raising risks.
Liquidity risk (const). The inflow of retail deposits issignificant. Short-term liabilities are a medium-term risk.Banks comply with LCR requirement and therefore canmeet their obligations even under stress conditions.
Legal risk (+1). A number of controversial court rulingson PrivatBank bail-out pose additional risks.
FX risk (const). Dollarization rate of assets and liabilitiesis high. However, open FX positions of banks do notpose risks to them. There will be no FX market volatility ifcooperation with the IMF resumes quickly enough.
Profitability risk (-1). Sector profitability exceeds priorNBU expectations and provisioning is limited. Operatingperformance of SOBs has somewhat improved. Highprofitability is to persist over the next quarters
5
0123456789
10credit risk
capitaladequacy
risk
liquidity risk
legal risk
FX risk
profitabilityrisk
June 2019 December 2018
Source: The NBU Financial Stability Report (June 2019).
The Ukrainian economy has been recovering steadily at a solid
pace despite military conflict and other headwinds
GDP, qoq change, % (seasonally adjusted)Contributions to Real GDP Growth, pp
Source: SSSU; NBU estimates and forecast (July 2019 IR).
6
-6
-4
-2
0
2
4
6
I.10 I.11 I.12 I.13 I.14 I.15 I.16 I.17 I.18 I.19
IT from 2016
SD* = 1.1SD = 0.5
* SD - standard deviation
Fixed ER
crisis
2,4 2,53,3 3,0 3,2 3,7
-8
-6
-4
-2
0
2
4
6
8
10
2016 2017 2018 2019 2020 2021
Consumption Investment
Net exports Inventories
GDP
Challenge #1. Threats to the independence of central bank
Government bonds in the NBU`s portfolio,
UAH bn
Source: NBU.
Public sector deficit, UAH bn, and public debt-to-
GDP ratio, %
Source: MFU, SSSU, NBU calculations and forecast
(Inflation Report July 2019).
0
20
40
60
80
100
0
50
100
150
200
250
2010201120122013201420152016201720182019
Bank recapitalization & other
Naftogaz
General government deficit
Public debt, % of GDP (RHS)
0
50
100
150
200
250
300
350
400
2008 2014 2020 2026 2032 2038 2044Inflation-linked
Longterm fixed-income
Previous issues (before reprofiling)
7
Implementation of best practice in communications helps to
preserve the independence
2015
2016
2018
2019
1998
2000
2008
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
2013 2014 2015 2016 2017 2018 2019
Mo
ne
tary
Po
licy T
ran
sp
are
ncy In
de
x
+5 points (from 9 to 14)
in 11 years (from 1998 to 2008)
+10 points (from 3.5 to 13.5)
in 5 years (from 2014 to 2019)
IT Adoption
IT Adoption
(de facto)
Ukraine
Czech Republic
+0,5 IR forecast publication
8
Challenge #2. Migration
Net Wages in Main Destination Countries for
Migrants relative to Wages in Ukraine, %
Productivity and staff real wage indices, seasonally
adjusted, Q1 2010=100
Source: SSSU, NBU staff estimates.
50
70
90
110
130
150
170
190
I.03 I.05 I.07 I.09 I.11 I.13 I.15 I.17 I.19
Labor productivity
Real wages (deflated by CPI)
Real wages (deflated by GDP deflator)
Source: SSSU, NBU staff estimates.
100
300
500
700
900
1100
1300
1500
1700
2013 2014 2015 2016 2017 2018
Poland RussiaItaly Czech RepublicGermany
9
Challenge #3. External vulnerabilities
Gross International Reserves and
Adequacy Criteria , %
Source: NBU.
0
50
100
150
200
250
300
350
400
0
5
10
15
20
25
30
35
40
2008 2010 2012 2014 2016 2018 08.19
In months of future imports (normalized to 3m), RHS
As a ratio to 20% of broad money, RHS
As a ratio to short-term debt, RHS
As a ratio to composite IMF measure, RHS
net international reserves
10
NBU’s FX Interventions* and
exchange rate
* As of 09.09.19
Source: NBU.
0
5
10
15
20
25
30-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
I.08 I.09 I.10 I.11 I.12 I.13 I.14 I.15 I.16 I.17 I.18 III.19
Ratio of interventions to gross reserves, %
UAH per USD (end of quarter, RHS, reverse order)
Challenge #4. High Non-Performing Loans (NPLs)
The NBU approved a regulation #97
on NPL resolution, which encourages
banks to set a clear time frame for
decreasing the volumes of these
exposures
The government is expected to issue
an additional decree that will govern
the handling of nonperforming
exposures by state-owned banks
The new supervisory boards of these
SOB are expected to deal with this
issue as their top priority
11
0% 10% 20% 30% 40% 50% 60%
World
EU
ECA*
Russia
Ireland
Belarus
Italy
Moldova
Greece
Ukraine
* Europe and Central Asia (excluding high income) as of
1 January 2018, Ukraine as of 1 January 2019.
Source: World Bank, NBU.
NPL ratios*
Challenge #5. Structural rigidities and supply-side constraints
12
7133
0 50 100 150 200
Dealing with Construction…
Getting Credit
Paying Taxes
Starting a Business
Enforcing Contracts
Registering Property
Protecting Minority Investors
Trading across Borders
Getting Electricity
Resolving Insolvency
globalRank
Poland
Ukraine
Ease of Doing Business ranking 2019
Source: World Bank.
TOP-5 major obstacles to foreign investment in Ukraine
Conclusions
Ukraine’s economy embarked on the recovery path in 2016, thanks to improved macroeconomic
management, strong support from donors, and a favorable external environment. Despite all the
challenges and headwinds during the year of dual elections, economic activity keeps growing at a
solid pace
The longer-term prospects of the economy strongly depend on the realization of key structural
reforms, which have to tackle major weaknesses such as the poor business climate, unfavorable
demographics and deteriorating infrastructure
Disinflation successfully proceeds, but its speed is altered by idiosyncratic shocks, further
adjustment of administered prices and recovering wages and domestic demand. Tight monetary
policy will ensure inflation falls back into the target band over the forecast horizon
Fiscal and external sustainability have improved remarkably over the last few years, but risks
remain amid threats of full-scale global trade war and global recession
NBU policy efforts continue to focus on securing price and financial stability, revamping the
banking system and liberalizing the capital account
13
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