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Ukraine: The Country and Its Banking System

BACEE’S 10 th CENTRAL AND EAST EUROPEAN BANK AND COUNTRY RISK SEMINAR. Ukraine: The Country and Its Banking System. Andrew BLINOV Senior Economist, International Centre for Policy Studies Budapest, 27 May 200 4. Republic Independence: 24 August 1991 Territory: 603,700 sq. km

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Ukraine: The Country and Its Banking System

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  1. BACEE’S 10th CENTRAL AND EAST EUROPEANBANK AND COUNTRY RISKSEMINAR Ukraine: The Country and Its Banking System Andrew BLINOV Senior Economist, International Centre for Policy Studies Budapest, 27May 2004

  2. Republic Independence: 24 August 1991 Territory: 603,700 sq. km Population (2003): 47.7 mn Capital: Kiev (Kyiv), 2.6 mn GDP per capita (2003, current rate): US$1,040 GDP per capita (2002, PPP): US$2,870 Number of licensed banks (2004): 157 Bank assets (2004, current rate): US$21.2 bn УКРАЇНАUKRAINE Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  3. About the International Centre for Policy Studies Economic Outlook Political Environment and Reforms Banking Sector Overview Banking System Indicators Risks and Challenges Presentation plan Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  4. About the International Centre for Policy Studies

  5. ICPS is an independent research organization foundedin 1994by the Soros-funded Open Society Institute Our goal is to promote public policy conceptsand procedures in Ukraine ICPS works with a variety of interest groups—government, business, NGOs, the media What is the International Centre for Policy Studies? Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  6. Economic policy Policy analysis Public administration reform European integration Regional policy and local government Development of non-government organizations Education policy Research areas Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  7. Quarterly Predictions—a quarterly overview of Ukraine’s economywith 3-year development forecast. Since 1997 Political Commentary—a monthly evaluation of Ukraine’s political situation, government policy, political competition and public dialog. Since 2003 Consumer Confidence—a unique Ukrainian quarterly survey of household expectations. Since 2000 Economic Statistics—a monthly table of key statistical data for doing business in Ukraine.Since 2000 Regional Trends—analysis of regional development and policy covering 1990–2002. Since 2003 Policy Studies—an occasional journal containing the results of ICPS research on key government policy issues, includingannual analysis of the impact of legislative changes on Ukraine’s business climate. Since 1999 Information about ICPS services is posted on www.icps.kiev.ua Internet shop launched in May 2003 Regular publications Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  8. Analysis of public policy alternatives and formulation of recommendations Analysis and development forecasts for specific markets Medium-term forecasts for macroeconomicand regional development indicators Impact analysis of company activities, particularly investment projects Analytical support for strategic planning Research into consumer behavior Business services Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  9. Economic Outlook

  10. New millennium brings rapid growth GDP, real % change Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  11. A population that is “getting” what business and market conditions mean A favorable pricing situation in global markets Active privatization Growing prosperity among consumers Financial stability What’s behind Ukraine’s economic revival? Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  12. External demand drives growth Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  13. Factors behind FDI growth: Large state-owned enterprises for sale High rates of economic upturn in a relatively stable political and social environment Ukraine’s removal from FATF blacklist of non-cooperating countries EU enlargement and shift of business from new EU member states aimed at minimizing labor costs Active privatization = Growth in FDI Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  14. Net foreign direct investment, millions USD Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  15. Consumer Confidence Index hits a new record high Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  16. Nominal exchange rate (UAH/USD) is stable Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  17. Moderate price dynamic is vulnerable Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  18. Consumption is slower than investment Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  19. Construction and export servicing boom Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  20. Pressure is taken off the Government regarding urgent systemic reforms, primarily in infrastructure Additional revenues from economic growth are not being directed towards reforms To reach 1990 levels, Ukraine’s economy will have to grow 10% annually for another seven years—until 2010 The euphoria of success carries risks Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  21. Rapid growth is not reflectedin Budget revenues, which are growing much more slowly than the economy There is a widening income gap in Ukrainian society Poverty is very high and the middle class too small—less than 15% of the population Internal demand is weaker than external demand Inadequate reforms = Social problems Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  22. Wages grow, but not their share of GDP Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  23. Ukraine’s sovereign ratings: up but still low Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  24. Political Environment and Reforms

  25. Despite the fact that Ukraine has declared almost 20 countries as its strategic partners, we considerRussia, the EU, and the USA to be the main fociof Ukrainian foreign policy On one hand, the EU and NATO enlargement to Ukraine’s borders is strengthening the influence of the West and making it imperative for the country to introduce European standards of governance anddemocracy On the other hand, the result of the March election in Russiahas confirmed increased expansionist intentions towards Ukraine, primarily in economy A shifting geopolitical situation Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  26. Joint projects with Russia: (1) Common Economic Area, (2) Gas Transport Consortium Improving relations with the US and the European Union is motivating Ukraine to carry out domestic economic and democratic reforms The EU considers Ukraine as a ‘new neighbor’—but nota potential member state Foreign policy priorities Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  27. In November 2002, the formation of a Cabinet of Ministers based on a majority formed in the legislature came to fruition. This improved political competition in Ukraine The failure of Constitutional reform, which would have limited the powers of the next president, was a painful defeat for the ruling coalition, which lost control of the legislature There could be considerable abuse during the presidential election, which threatens to turn into a dirty match Political competition Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  28. Though Viktor Yushchenko of the Nasha Ukraina bloc is favored to win the presidency in 2004, his main rival,Premier Viktor Yanukovych, is rapidly closing the gapon the tails of rapid economic growth The effectiveness of current policy is dubious: in terms of pushing through tax and pension reforms and resuming large-scale privatization, the Cabinet clearly lacks a consolidated strategy. It is very passive in reforming monopolies and not efficient with price stabilization The opposition operates on the basis of slogans ratherthan specific programs Political competition and reforms Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  29. Banking Sector Overview

  30. The banking system of Ukraine Two-pillar; National Bank of Ukraine functions as the central bank and the banking sector regulator State banks do not dominate, though Oshchadny Bank, the savings bank, has the privilege of personal deposits state guarantees Low foreign capital participation—12% of charter capital Not well integrated into world banking system, undercapitalized. Assets amount to US $21.2bn or 36% GDP, but capital totals only US $2.6 bn or 4.3% GDP Highly concentrated—Top 10 banks control more than halfof all assets Interested in expanding into insurance and pension markets Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  31. More dynamic than the general economy Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  32. Banking indicators and GDP growth% nominal change Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  33. Capitalization goes down Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  34. Greater oversight of banking system • Intensified after 1998 financial crisis • Major issues: • new IAS-based accounting standards implemented in 1998 • anti-laundering procedures since 2003 • increased minimum charter capital requirements since 2003 • increased reserves coverage for asset transactions,from 61% in 2000 to 96% in 2003 • toughening of liquidity ratios, namely mandatory capital adequacy(not less than 10% since March 2004) • state mortgage register launched in 2004 • special attention to shareholders who own more than 10% of a bank and to insider lending Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  35. Number of banks Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  36. Bankruptcy Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  37. Coming and going Registered over 2003–4: • ARMA (Kyiv) • DANIEL (Kyiv) • LEADER (Kyiv) • STOLITSA (Kyiv) • TRUST-CAPITAL (Kyiv) • SOTSKOMBANK (Odesa) • UKRAINSKIY FINANSOVIY MYR (Donetsk) • FOKAS (Kyiv)–Swiss investor Aspra Finanz Holding • UKRAINIAN BANK FOR RECONSTRUCTION AND DEVELOPMENT (Kyiv)–owned by Ukrainian State Innovation Company Liquidated over 2003–4: • TECHNOBANK (Dnipropetrovsk)–could renew activity • OLBANK (Kyiv) • UKRSPETSIMPEXBANK (Kyiv) • NASH BANK (Zaporizhzhia) • ROSTOK BANK (Kyiv) • CREDIT SUISSE FIRST BOSTON (Ukraine) Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  38. Minimum charter capital requirement escalation • Since 17 January 2003, new licensing principles introduced. Until 2004, the minimum charter capital value had to be at least: • for nationwide Ukrainian banks — €5 million • regional banks — €3 million • cooperative local banks — €1 million • Each year, until 2007, requirements must be upgraded. For 2004, the minimum charter capital value should be at least: • for nationwide Ukrainian banks — €5.5million • regional banks — €3.5million • cooperative local banks — €1.15million Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  39. Charter capital structure Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  40. Banking System Indicators

  41. Assets structure Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  42. Liabilities structure Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  43. Income structure Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  44. Expenditures structure Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  45. Top-performing banks in 2003 Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  46. Risks and Challenges

  47. Sector problems: external factors Low asset diversification (lack of financial instruments,weak non-bank financial sector, restrictions on capital flows) Poor adaptation to international standards, including Basel requirements Absence of full-fledged register of borrowers and property owners Creditors’ rights need strengthening: currently, borrowers have more rights Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  48. Sector problems: internalfactors Low level of financial mediation: credits-to-GDP ratio(as well as deposits-to-GDP ratio) is less than 25% Disproportionate rates of growth of personal depositsand loans to individuals, relatively high interest rates on deposits (significantly higher than on government bonds) Balance capital rates of growth are lower than moneymass and liabilities Absence of long-term (5+ years) loans, shortage of medium-term (1+ years) loans Large share of bank overheads (often for non-bank activity) Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  49. Challenges Increase capitalization Improve corporate governance, management and internal audit quality Improve NBU banking risk oversight system and outside audit, with more attention to IAS norms Increase transparency of banking operations with more responsibility for disclosure Lobby indispensable legislation to improve both creditor and investor rights Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) 236-4477 Web: www.icps.kiev.ua

  50. Thank you for your attention

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