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NBU Annual Report 2020: 10 facts about changes in the economy and financial system in the first year of the pandemic

NBU Annual Report 2020: 10 facts about changes in the economy and financial system in the first year of the pandemic

The National Bank of Ukraine has published its  Annual Report 2020, reporting about its operations and summarizing changes that took place in the Ukrainian financial system and economy in the first year of the COVID-19 pandemic.

Same as last year, Annual Report 2020 is dedicated to results of the implementation of the NBU’s medium-term strategy and seven goals it defines for the central bank.

Ukrainian economy has proved more resilient to the coronavirus crisis than to any previous crises before

The unfolding crisis and the imposition of strict quarantine measures amid concerns in global markets pushed Ukraine’s economy into recession. However, real GDP shrank by 4% in 2020. That is much less than the NBU expected (6%).

In addition, this is a much lower drop compared to previous crises in 2009 when the GDP decreased by 15.1% and in 2014-2015 when it shrank by 6.8% and 9.9% respectively.

In H2 2020, the economy began a fairly rapid recovery. Consumer demand was the main driver of the recovery. Accommodative monetary policy and the anticrisis package also contributed to the upward trend.

Support for the economy: NBU reduced the key policy rate to a historic low and and introduced the anticrisis package

Low inflation and quick stabilization of the situation in financial markets enabled the NBU to focus on supporting the economy without putting at risk its priority objective of reaching and maintaining price stability. The regulator continued to ease its monetary policy. In 2020, the key policy rate was reduced from 13.5% to an all-time low of 6%.

In addition, in 2020, the NBU along with the world’s leading central banks used the extended arsenal of anticrisis measures to support financial system and the economy in general. Banks were able to apply for long-term refinancing with a maturity of up to five years. It allowed the banking system to remain highly liquid. The NBU introduced a new instrument – the interest rate swap – which banks can use to hedge themselves against the interest rate risk without including the risk premium into the rates on loans to the real sector.

The NBU eased a number of regulatory and supervisory requirements for the crisis period to allow banks to focus their full attention on lending. Specifically, the NBU relaxed the requirements for credit risk assessment, delayed building capital buffers, postponed submission and publication of financial reports, and suspended on-site inspections and stress tests of banks.

Despite the coronavirus crisis, the inflation was 5% in 2020

Due to the pandemic, the year 2020 was marked by difficult macroeconomic conditions and high levels of uncertainty. Nevertheless, inflation reached the midpoint of the 5% ± 1 pp target range at the end of the year.

This was primarily due to our consistent, transparent and prudent monetary policy aimed at ensuring the right balance between a response to inflation risks and support for economic recovery during the coronavirus crisis.

The country’s "safety cushions": international reserves reached an eight-year high

International reserves reached USD 29.1 billion at the end of 2020. This is an eight-year high. 

At the start of the coronavirus crisis, FX demand grew significantly, while hryvnia weakened. The scale of the FX market shock in March 2020 was comparable to that seen in 2008–2009 and in 2014. The NBU conducted a consistent FX market policy cooling down a heated demand for foreign currency and stabilized the situation in the FX market by the end of March.

This enabled the NBU to purchase foreign currency again and to recover the large amount of foreign currency sold in March. Steady inflows of foreign currency from export-oriented sectors (in particular, from the agro-industrial complex) and relatively moderate import payments also contributed to replenishing reserves.

The coronavirus crisis proved the effectiveness of previously introduced macroprudential measures

Ukrainian banks entered the crisis well-capitalized, profitable, and with a significant margin of liquidity. The NBU’s efforts to improve the health of the banking sector, implement internationally recognized capital and liquidity requirements, regular stress testing, risk-based supervision, and incentives for banks to build a safety margin in good times had prepared banks well for this crisis.

In addition, before the crisis broke out, the regulator successfully resolved the sector’s long-standing credit problems, which had been amplifying the negative effects of previous crisis episodes on the financial system and the real economy. These measures helped ensure that the financial sector came through 2020 without significant losses and without becoming a factor that deepened the crisis. Instead, banks pursued their function of supporting the economy.

Interest rates on corporate loans entered the single-digit range

The start of the pandemic coincided with the NBU’s monetary policy easing cycle. In H1 2020, the NBU cut its key policy rate four times to the all-time low level of 6%. This contributed to a decrease in interest rates, including lending rates, despite the crisis.

Rate on new hryvnia corporate loans decreased from 15.7% to 9.2% per annum in the past year. Short-term loans and loans to reliable borrowers were the least expensive. Reduction in interest rates on loans and state programs to support businesses helped boost corporate lending, particularly hryvnia corporate lending.

Mortgage lending picked up significantly. The demand was driven to a significant extent by lower interest rates. Net hryvnia loans for the purchase and renovation of real estate increased by 11.5% over the year. In H2, monthly average amount of new loans more than doubled compared to both H1 2020 and to the whole of 2019.

The coronavirus crisis was the first crisis not accompanied by retail deposit outflows from banks

On the contrary, the inflow of funds into the banking system could be observed during the entire 2020. Adequate banks liquidity helped preserve confidence of depositors.

When first signs of a crisis emerged in March 2020, banks experienced a traditional wave of cash withdrawals. However, this sentiment was short-lived. Deposit outflows lasted for less than two weeks. With plenty of liquidity, banks had no difficulty satisfying customers’ deposit withdrawal requests in full at short notice. This helped preserve their confidence.

Hryvnia retail deposits grew by 26.5% for the year, while much cheaper foreign currency retail deposits increased by 0.6% in the U.S. dollar equivalent. The increase in banks’ household funds was driven by demand deposits.

Hryvnia corporate deposits grew by 34.5% over the year, while foreign currency corporate deposits increased by 2.2% in the U.S. dollar equivalent.

The loan portfolio quality did not deteriorate much as a result of the coronavirus crisis

This was facilitated by both the high loan portfolio quality before the crisis and banks’ timely actions in loan restructuring.

Requirements to writing off impaired financial assets approved by the NBU helped reduce the nonperforming loans on banks’ balance sheets, mostly in state-owned banks.  As a result, the system’s total NPL ratio declined by 7.4% pp and down to 41% at the end of 2020. Nonperforming loans pose no threat to the banking system, as the NPL coverage ratio was almost 98% at the end of the year.

The year 2020 was marked by a rapid digital transformation of the financial system

The pandemic and quarantine restrictions shifted people’s priorities toward remote solutions, digital finance and cashless transactions. The number and volume of payment card transactions continue to grow steadily. The share of cashless operations in Ukraine using payment cards increased from 50% at the start of the year to almost 56% at the end of 2020.

To make this happen, in 2020 the NBU offered financial institutions different models to remotely identify and verify their customers: five simplified and three full-fledged models. This could be done by using the Diia app or through NBU BankID (at the end of 2020 the the system’s online services were available to 94% of payment card users in Ukraine).

In addition, at the end of 2020 the Verhovna Rada of Ukraine registered Draft Law No. 4364 on payment services aimed at adapting the Ukrainian legal framework to EU laws and bringing up to date the regulation of Ukraine’s payments and transfers market.

The SPLIT project was implemented: about two thousand of nonbank financial institutions fell under the NBU supervision

As of 1 July 2020, the NBU has been the regulator of the majority of the nonbank financial sector. Almost two thousand of institutions – insurers, insurance intermediaries, lessors, finance companies, credit unions, pawnshops and credit bureaus – have fallen under the NBU supervision.

In 2020 the NBU together with the market representatives and members of the parliament started to lay the groundwork for new regulation of nonbank financial sector. In particular, the proposals on new versions of draft laws On Insurance, On Credit Unions, and On Financial Services and Financial Companies were prepared.  The NBU also developed and published a number of key regulations for nonbank financial sector.

An active development of the nonbank financial services has become a notable global trend of the past two decades. Nonbank institutions in developed countries have already taken over a significant market share due to their flexibility, development of technologies and globalization of finance. Meanwhile, the Ukrainian financial sector remains bank-centric. Furthermore, the obsolescence of regulation and supervision have led to a build-up of risks and a decrease in the sector’s transparency. NBFIs were also sometimes used to redistribute funds among business groups and for tax evasion purposes.

The SPLIT reform aims to boost the sector’s transparency, create a system of proportional regulation, and build a reliable and stable nonbank market, providing the market players with new prospects for the development.

Read more in the NBU’s Annual Report 2020.

The NBU’s consolidated financial statements and the consolidated governance report for 2020, as well as the auditor's report, are available at the following link:

For reference

Compiling and disseminating annual reports is common practice for all central banks. The NBU’s consolidated financial statements comprise an integral part of the Annual Report. The NBU had its financial statements audited by auditing company Ernst & Young Audit Services LLC.

The NBU has been publishing annual reports since 1994.

Annual reports for 1994 through 2020 are available on the NBU’s official website. The central bank has digitized all of the paper versions of the annual reports, starting from 1994. The electronic versions of these reports are available on the NBU’s official website.

 

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