High interest rates in Ukraine Presenter: Vitaliy Kravchuk

1. High interest rates in Ukraine Presenter: Vitaliy Kravchuk Institute for economic research and policy consulting Institute for Economic Research and Policy Consulting www.ier.com.ua

2. Contents • Interest Rate Patterns in Ukraine • Factors of high interest rates • Final remarks Institute for Economic Research and Policy Consulting www.ier.com.ua

3. Bank lending rates to corporates Institute for Economic Research and Policy Consulting www.ier.com.ua

4. Interest Rate Patterns in Ukraine • Bank lending rates in Ukraine remained high over the last years. • Average lending rates never went below 13% in Ukrainian banking system and exceeded 20% in 2009. • However peak rates for loans to nonfinancial corporations exceeded 30% in 2010 but went down to 25% in 2011. Institute for Economic Research and Policy Consulting www.ier.com.ua

5. Peak lending rates Institute for Economic Research and Policy Consulting www.ier.com.ua

6. Factors for high interest rates • High and volatile inflation • Absence of long-term domestic funding • Institutional factors • Insufficient information on credit risks • High risk of default • Low recovery on delinquent loans • Currency controls limiting foreign currency lending and foreign exchange risk hedging Institute for Economic Research and Policy Consulting www.ier.com.ua

7. Real interest rates Institute for Economic Research and Policy Consulting www.ier.com.ua

8. High and volatile inflation • Before crisis commodity price boom and unsterilized capital inflows led to high inflation • During crisis high inflation expectations and exchange rate devaluation • Recently CPI growth went down and reached less than 4% in January • Inflation expectations remain in double digits • As a result nominal rates are high despite moderate real rates. Institute for Economic Research and Policy Consulting www.ier.com.ua

9. Funding costs • External funding • Before crisis external funding was cheap(interest rates below Ukrainian CPI) • Now external funding is more expensive and scarce • Also ability to lend in foreign currency and ability to hedge exchange rate risks is lmited • Domestic funding • High share of shadow economy led to low transactional deposits • As a result high dependence on expensive household deposits for hryvnia funding Institute for Economic Research and Policy Consulting www.ier.com.ua

10. Business environment • Credit reference bureaus • Three competing major bureaus • Small databases and lack of data exchange between bureaus • Prevalence of negative information • Low coverage of business credit histories • High risk of default • Before crisis incomplete credit vetting • After crisis unfavourable economic conditions • Low recovery • Deficient legislation with loopholes for borrowers including options to procrastinate • Overloaded courts and protracted court proceedings • Lackluster execution of court proceedings • Risk of fraud and corruption Institute for Economic Research and Policy Consulting www.ier.com.ua

11. Final remarks • High interest rates constrain development of SME sector and investment in the economy • But SMEs in Ukraine are currently more concerned with negative regulatory climate and corruption than with access to credit • Thus efforts for lower interest rates must be accompanied by reforms to improve regulatory climate Institute for Economic Research and Policy Consulting www.ier.com.ua

12. Thank you for your attention Contact information: Institute for Economic Research and Policy Consulting www.ier.com.ua institute@ier.kiev.ua 8/5-А Reytarska str., Kyiv 01034, Ukraine Phone +38-044-278-6360 Fax +38-044-278-6336 Institute for Economic Research and Policy Consulting www.ier.com.ua