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Financial Stability Council Meeting Recap: Systemic Risks High But Controlled

Financial Stability Council Meeting Recap: Systemic Risks High But Controlled

The Financial Stability Council (FSC) held a scheduled meeting on 12 April 2022. The first order of business was to discuss systemic risks to the financial sector, and the steps taken to safeguard the financial stability in Ukraine.

Russia’s full-scale military aggression against Ukraine has significantly raised all risks affecting the financial system’s stability. Ukraine stands to lose a substantial portion of its GDP in 2022. Inflationary pressures remain significant due to the destruction of production and transport infrastructure and higher production costs. As a result, Ukraine has seen significant growth in state budget expenditures to support businesses and facilitate the gradual recovery of the economy.

In Q1, budget revenues were supported by advance dividend payments by state-owned companies and profit transfers by the NBU. With Q2 revenues expected to be limited, it is becoming increasingly more important for Ukraine to receive more support from international donors.

As the war broke out, the NBU fixed the exchange rate and imposed restrictions on capital movements. Those measures markedly eased pressure on the FX market. The level of the NBU’s international reserves remains acceptable, but the export potential is significantly limited, by logistical hurdles in particular. Energy prices, especially those for natural gas, have surged. As the war has raged on, global growth forecasts have also been downgraded, and international trade has declined.

The FSC members highlighted the stability of the financial system in the current conditions. This has been accomplished through the financial sector reform implemented in recent years and the timely anti-crisis measures taken by regulators since the war began. The banking sector’s liquidity is high: client deposits denominated in all currencies have increased by UAH 41 billion since the outbreak of hostilities. Hryvnia corporate loans have been growing since March. According to a survey of large banks, they are planning to grant UAH 68 billion in business loans in Q2, primarily to agricultural producers and through government programs.

The NBU continues to take emergency measures to support banks while under martial law. Specifically, banks have permission to grant loan repayment holidays and disregard the time that a loan has been overdue when assessing credit risk. Banks are also allowed to restructure loans to debtors affected by russia's aggression. Banks are exempt from corrective actions for violating capital adequacy and liquidity ratios.

Though high, most systemic risks to the financial sector remain under joint control of the government authorities and institutions.

The FSC members agreed that in order to maintain financial stability, the NBU’s monetary financing of the state budget should be kept to a minimum. To achieve this, we must continue to raise official funding from international partners on preferential terms, and try as best we can to save our budgetary resources and international reserves while martial law is in effect. Budget expenditures should primarily be increased in priority areas, such as ensuring the country’s defense and social protection capabilities. At the same time, the provision of tax benefits should be targeted, not comprehensive.

For reference

The following FSC members participated in the meeting: Kyrylo Shevchenko, NBU Governor, Serhii Marchenko, Minister of Finance of Ukraine, Svitlana Rekrut, Managing Director of the DGF, Ruslan Mahomedov, Head of the National Commission on Securities and Stock Market, Yuriy Heletiy and Yaroslav Matuzka, NBU Deputy Governors, Yurii Drahanchuk, Deputy Minister of Finance of Ukraine for European Integration, and Rostyslav Shurma, Deputy Head of the Office of the President of Ukraine. Also in attendance were Kateryna Rozhkova, NBU First Deputy Governor, Sergiy Nikolaychuk, NBU Deputy Governor, Oleksii Shaban, NBU Deputy Governor, and Maksym Libanov, Member of the National Commission on Securities and Stock Market.

The FSC was established by a presidential decree in March 2015. The FSC provides a forum for the professional discussion of systemic risks to domestic financial stability.

 

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