A stocking-stuffer for Ukrainians from the government: PrivatBank

28.12.2016

Privat bankIn the last two years, PrivatBank has drawn attention of financial sector participants not only by its size and aggressively innovative approach to task solution, but primarily by the ability to handle the National (Central) Bank’s regulations which govern the operation of financial institutions and maintain cleanness of banking business in the country.

However, information began appearing in the press as early as the middle of the current year that the bank is not completely OK, lacks capital, has heavy loan debts of affiliated persons etc. It was a persisting question what a solution would be found for this systemically-important financial institution: the National Bank and the government had either to agree with the bank’s owners on a package of measures for its sanation, first of all through the owners’ actions, or to go the way of nationalization. Ultimately, at the December 18 meeting, the government did decide to up and nationalize the bank.

This decision will have not the best impact on (further) processes at the levels of macro-economy, financial sector, enterprises and individuals.

By the nationalization of PrivatBank, the government assumes all of the bank’s liabilities and responsibilities. The Head of the National Bank says that, according to current assessments, UAH 148 Bl is needed for additional capitalization of PrivatBank. The government can find this funding only by increasing the public debt.

The diagram shows that PrivatBank’s capital deficit equals 19.1% of total expenditures built into Ukraine’s State Budget for 2017. The Finance Minister says the government is planning to fill this deficit in several stages. At the first stage, UAH 43 Bl – 5.4% of the 2017 budgetary expenditures – will be allocated against the Finance Ministry’s bonds. Therefore the expenditure budget must also be increased: the exact amount will become known shortly.

In order to compensate for the rise in expenditures, the government will most likely go the way of cutting down on some expenditure items and, evidently, stepping up duties, excise, performing special confiscation etc. A monetary expansion “for the good of the cause” can’t be ruled out either. The ultimate “beneficiaries” of such actions will be companies and individuals.     

Financing PrivatBank’s bad debts by the government resembles the quantitative easing policy pursued by the central banks of many countries. In our case, the great difference consists in the fact that over 97% of PrivatBank’s corporate loan portfolio is associated with its shareholders and this step of the National Bank (after at least a year of talks with the owners) resembles rather a policy of saving their capitals and hasty actions for saving the bank itself. 

Growth of the public debt against the nation’s GDP will make Ukraine less attractive in terms of credits and investments. However, it appears that this will produce no significant impact. Certainly, the decision to nationalize the bank was made after approval by the key international creditors, since it is better to face a mounting debt burden on the customer than a new credit Maidan. It is not for nothing that the IMF, the EBRD and European ambassadors in Kyiv evaluated this decision as an important step “in efforts to ensure financial stability.”

At the financial sector level, the above-mentioned event must entail adjustments in the policy of the state for its maximum privatization. Over 50% of the financial system has concentrated in state ownership. The plans for raising profitability, stability and controllability of banks – for example, soon privatization of OschadBank – will be revised.      

The turbulent period in depositors’ sentiment about their money and accounts in PrivatBank, exchange of the hryvnia into foreign currency will end quite soon, provided the government acts accurately. A more significant consequence may be an outflow of deposits due to cutting their interest rates down to the “state” level. Part of the withdrawn money will go to other banks, more attractive in terms of offered interests, and the remainder will settle down at home or come to the market.    

Increasing the public expenditures and debt burden with a slowly growing economy will push up prices and pull down the national currency. This will happen with a delay and probably in a barely noticeably manner to companies and individuals, unless new surprises arise. 

Dear colleagues, effective owners and everybody who reads us! We are ready to receive your suggestions and ideas about a major question of the coming year 2017: what will be the next measures for recovery in Ukraine’s financial sector and entire economy? Your ideas will be received by January 15 – the winner will be awarded a valuable prize.

 

UkrAgroConsult

 

 

 

 

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