The risks to macrofinancial stability are minimal under the current economic situation, which goes to the path of sustainable growth and is characterized by stabilization of inflation and exchange rate expectations. The government’s decision to take over PrivatBank PJSC eliminated the systemic risk to financial stability and at the same time will not have significant effect on the Ukrainian FX market and macroeconomic indicators.
To increase the capital of PrivatBank, the Ministry of Finance of Ukraine will issue domestic sovereign bonds for UAH 116.8 billion. However, no money will be issued into circulation as a result. The bonds are a reliable asset that will secure fulfillment of the bank’s obligations to its depositors. The bond yield of around 10% annually will be a never failing source of revenue for the bank.
Moreover, as any other Ukrainian bank, PrivatBank can request liquidity support from the NBU. For example, on 20 December 2016, the NBU arranged UAH 15 billion in refinancing for PrivatBank to support liquidity of the bank and ensure smooth and uninterrupted customer servicing, operation of branches and ATMs, and timely settlements. In future and if requested, the NBU will also provide PrivatBank with liquidity support through loans against pledged domestic sovereign bonds, as well as their direct purchase.
The NBU controls potential consequences of monetization of domestic sovereign bonds issued by the Ministry of Finance for PrivatBank
In case, the NBU provides PrivatBank with liquidity support:
- money supply growth through this channel will be considerably stretched in time.
- amount of monetization of domestic sovereign bonds will be substantially less than the amount of the bank's capitalization as the needs of PrivatBank in additional liquidity will not be significant, according to the National Bank. The bank has quickly returned to normal functioning. Expectations of the public and market participants show signs of stabilization. Due to that, cash outflows from the bank are declining.
Also, the recent experience of replenishing the capital of other state-owned banks by the Ministry of Finance shows that only a small share (around 6%) of the domestic sovereign bonds issued for this purpose is monetized.
Meanwhile, the NBU is equipped with a whole set of instruments to apply so that operations to support PrivatBank’s liquidity impose no pressure on inflation and the FX market
First, excess liquidity of the banking system is regularly sterilized through the NBU’s certificates of deposit. The level of interest rates offered on these operations already account for the need to mitigate inflation and depreciation risks. Unlike in previous years, the NBU’s interest rate policy is now an efficient tool for influencing the money market.
Second, the NBU has accumulated sufficient international reserves of USD 15.5 billion to smooth out FX market fluctuations if needed. For example, on December 20, 2016, in response to imbalances in the interbank market, the NBU sold USD 28.4 million to market participants at an FX sale auction.
Stable functioning of the economy and monetary market is currently supported by fundamental conditions, which are improving now
Ukraine’s fundamental economic conditions are improving. Favorable trends in the global markets of ferrous metals and iron ore persist, and the yield of grains and other agricultural products are the highest in recent years. Thanks to all these factors, the NBU was able to purchase foreign currency in the market during the year. Moreover, these factors have allowed the NBU to resume purchase of foreign currency even after PrivatBank became public. On December 22, the National Bank bought USD 28.4 million of foreign currency at the FX auction.
The Ukrainian economy is recovering, in Q3 real GDP grew at a 2% pace y-o-y. Investments remain the key driver of GDP growth, with gross fixed capital formation growth accelerating to almost 25% y-o-y.
The NBU keeps monetary policy prudent and aimed at price stability. This approach resulted in inflation dropping from 43% at the end of 2015 to 12.1% in November 2016, which was in line with declared target of 12% +/- 3 pp. Next year’s monetary policy target is to bring headline inflation down to 8% +/- 2 pp.
Furthermore, state participation in PrivatBank’s capital improves Ukraine’s chances to receive the next tranche under the EFF Program with the IMF already at the beginning of 2017. Other international financial institutions, international partners, investors, and experts also speak positively of this step.
