On 12 April 2023, the NBU held an online meeting with the leadership of Ukrainian businesses that participate in the central bank’s business outlook surveys. The meeting was an interactive Q&A session. This mode of communication is optimal for conveying to businesses the most up-to-date information about the NBU’s current key objectives and ways to meet them, as well as for receiving feedback and discussing issues that are of interest to members of the business community.
"We are grateful to Ukrainian businesses for their perseverance in these exceptionally difficult times and for their interest in maintaining constructive dialogue with the NBU. The results of business outlook surveys give us a thorough understanding of businesses’ expectations and sentiment. This information comes as especially important during the NBU’s monetary policy decision making," Yuriy Polovniov, Director of the NBU's Statistics and Reporting Department, said as he opened the meeting.
Heads of the NBU’s Monetary Policy and Economic Analysis Department, Financial Stability Department, Open Market Operations Department, and Financial Monitoring Department took part in the event, which convened representatives of more than 90 companies from nearly every region and line of business in Ukraine.
The meeting covered a wide range of issues in four key areas:
Current macroeconomic conditions in Ukraine and cooperation with the IMF
Inflation has declined for the third straight month, to 21.3% per annum in March 2023. The easing of inflation was partially due to a sufficient supply of food and fuel, a better situation in the energy sector, improved expectations, and the positive impact on the FX market of the central bank's efforts to make hryvnia assets more attractive.
Business activity is recovering faster than predicted in the NBU’s January macroeconomic forecast (January 2023 Inflation Report). The economic recovery is also corroborated by Business Outlook Survey data. Such developments have been driven by both improved energy sector conditions and better expectations of households and businesses, including because of sustained exchange rate stability and the cessation of the monetary financing of the budget deficit in 2023.
Avoiding the monetary financing of the budget shortfall this year is a goal pursued jointly by the central bank and the government. The disbursement of the announced volumes of international aid, and the revival of the domestic debt market, should be sufficient to fully finance the budget deficit. Such a goal is enshrined in the Memorandum of Economic and Financial Policies that accompanies the new IMF-supported program.
By signing the Extended Fund Facility arrangement with the IMF amid exceptionally high uncertainty and by successfully implementing the recently completed Program Monitoring with Board Involvement, Ukraine has sent a powerful signal to its other partners. International support has been an important component of ensuring macrofinancial stability in Ukraine.
Banking sector conditions and risks to financial stability
From day one of the full-scale war, the financial sector has been a driver of the economy, not a booster of shocks to the system. Risks to financial stability are currently under control. Most of the banks have a margin of safety that is good enough to successfully meet challenges.
Credit risk remains the biggest threat to the banking sector. Potential losses to the loan portfolio may reach 30% due to the inability of some borrowers to service loans, but this effect will be spaced out in time until the end of the year. The banks have shareholder commitments to meet, meaning they have to agree to restructurings and make concessions to businesses affected by the war. At the same time, the banks have to prioritize the preservation of their own stability.
The NBU will soon launch an assessment of the banks' resilience in order to determine the current quality of the loan portfolio, assess the banks' capability to generate income going forward, identify optimal approaches to a potential further recapitalization, and resolve NPLs. Solvent banks with efficient business models will be given enough time to recapitalize. This is what guarantees the system's ability to lend as demand recovers.
The key driver of lending amid high wartime risks is the banks’ and borrowers’ access to public programs that support lending. Affordable Loans 5–7–9% is one of such initiatives. The program’s terms have recently been recalibrated to reflect the changing economic landscape and market conditions. The purpose of such an update is to expand the range of financial instruments available to borrowers and optimize the budget of the program by transitioning its borrowers to nonzero interest rates.
Ukrainian banks with foreign capital whose parent banks still have russian-based branches are playing a significant role in ensuring Ukraine’s financial stability and supporting its economy. Since the onset of the full-scale invasion, they have been providing their clients with credit resources and convenient services, ensuring the smooth operation of a large part of the banking infrastructure. At the same time, such banks have little to no impact on the decisions of their parent institutions. In view of this, Ukrainian banks deserve support and should participate in the banking sector’s development, economic programs, and humanitarian projects to ensure financial stability.
NBU’s plans to ease currency restrictions going forward
The NBU's imposition of administrative restrictions since the breakout of the full-scale invasion was a forced move intended to preserve the stability of the FX market and protect international reserves. During martial law, the NBU has sold more than USD 30 billion to balance out supply and demand in the FX market. At the same time, the NBU's interventions would have been significantly greater if it had not taken measures to counter unproductive capital outflows.
At the same time, as previously reported, all administrative controls imposed by the central bank since the enforcement of martial law are temporary. The NBU is aware that over time, the balance of advantages and disadvantages of harsh administrative restrictions undergoes change: the deterrent potential decreases, while market distortions and the dissatisfaction of market participants increase. With this in mind, one of the NBU's priorities is to create prerequisites for a gradual easing of FX restrictions that does not trigger shocks to the FX market and the economy.
Within the framework of the new Extended Fund Facility, Ukraine undertook to relax FX restrictions step-by-step after the situation normalizes. The central bank is working on a roadmap to phase out FX controls. Such a document will prioritize which restrictions to loosen based on the costs and benefits of their application.
Temporary FX restrictions will be rolled back according to the same principles that proved effective during the pre-war liberalization of FX transactions. This process will take place in stages and will not be tied to specific deadlines. Before making relevant decisions, the NBU will check whether the necessary macroeconomic prerequisites are met, and thoroughly analyze the impact of such decisions on the FX market and the economy.
Tightening AML/CFT requirements, and wartime sanctions policy
Legislative changes in the field of AML/CFT are aimed at safeguarding Ukraine's financial system from the aggressor's actions and adapting Ukrainian laws to FATF standards. The new version of the Law of Ukraine On Prevention and Counteraction to Legalization (Laundering) of the Proceeds from Crime, Terrorism Financing and Financing of Weapons of Mass Destruction (hereinafter the AML/CFT Law) stipulates an expanded list of clients that the banks and NBFIs must designate as posing a high risk of money laundering and terrorist financing. From this time forward, such clients include individuals and legal entities that have relations with a state that has perpetrated armed aggression against Ukraine. Furthermore, a financial transaction that exceeds an equivalent of UAH 400,000 is also identified as threshold if at least one of the parties to such a transaction is based, permanently resides, or is located in a country that has perpetrated armed aggression against Ukraine.
In accordance with the updated version of the AML/CFT Law, the Ministry of Finance of Ukraine and the NBU are currently improving their approaches to identifying the ultimate beneficial owners of legal entities. This effort will make it easier to detect companies that try to cover up their affiliation with an aggressor state.
Decisions regarding the imposition of sanctions are made by the National Security and Defense Council of Ukraine, are put into effect by relevant Presidential Decrees, and are mandatory for all market participants.
To streamline the procedure for the enforcement of sanctions, the NBU is drafting amendments to the mechanism of sanctions implementation by the banks and certain NBFIs. This mechanism was approved by NBU Board the Resolution No. 654 On the Implementation and Monitoring of Personal Special Economic and Other Restrictive Measures (Sanctions) dated 1 October 2015.
NBU representatives are members of an interagency working group on the enforcement of public sanctions policy.
The NBU will maintain the practice of holding regular meetings with business leaders who participate in its business outlook surveys. As before, the central bank invites businesses to take more active part in its online surveys through the mobile app Business Outlook Surveys. The app is available to download from Google Play or the App Store.