On April 12, 2023, the National Bank held an online meeting with heads of Ukrainian enterprises participating in surveys regarding their business expectations. The meeting took place in the interactive format of a question-answer session. This format is optimal in order to convey to business representatives the most up-to-date information about the current key tasks of the NBU and the ways of their implementation, and at the same time receive feedback and discuss issues of interest to business representatives.
“We are grateful to Ukrainian business for its stability in these extremely difficult times and for the constant productive dialogue with the National Bank. The results of enterprise surveys provide us with a comprehensive understanding of business sentiments and expectations. This, in particular, is important information for the adoption of monetary policy decisions by the National Bank,” noted Director of the Department of Statistics and Reporting of the NBU Yury Polovnev, opening the meeting.
Heads of the departments of monetary policy and economic analysis, financial stability, open markets and financial monitoring from the National Bank took part in the event, which gathered representatives of more than 90 enterprises of almost all types of activity and regions of Ukraine.
The program of the meeting covered a wide range of issues in four key areas:
The current macroeconomic situation in Ukraine and cooperation with the IMF
Inflation is decreasing for the third month in a row – to 21.3% per annum in March 2023. The slowdown in inflation was facilitated, in particular, by a sufficient supply of food and fuel, a better situation in the energy sector, improved expectations, and the positive impact on the foreign exchange market of the NBU’s work in the direction of increasing the attractiveness of hryvnia assets.
Economic activity is recovering faster than predicted in the January macro forecast of the NBU (Inflation Report, January 2023). The revival of the economy is also confirmed enterprise survey results. Such dynamics are due to both the better situation in the energy sector and the improvement of expectations of households and businesses, including thanks to the preservation of exchange rate stability and the end of the monetization of the budget deficit in 2023.
Avoiding emission financing of the budget deficit in the current year is a common goal of the NBU and the government. Given the announced volumes of international aid, as well as the activation of the domestic debt market, the budget deficit should be fully financed from these two sources. The corresponding goal is fixed in Memorandum on economic and financial policywhich is accompanied by a new program with the IMF.
Ukraine’s conclusion of an expanded financing program with the International Monetary Fund in conditions of unprecedented uncertainty, as well as successful implementation of the provisions of the agreement concluded the day before Monitoring program with the involvement of the IMF Council is a powerful signal to other partners. International support is an important component of ensuring macro-financial stability of Ukraine.
State of the banking sector and risks to financial stability
From the first day of full-scale war, the financial sector has been a helper to the economy, not a booster of shocks to the system. Currently, the risks to financial stability are under control. Most banks have a good margin of safety to successfully face challenges.
Credit remains the biggest risk for the banking sector. Potential losses of the loan portfolio may reach 30% due to the inability of some borrowers to service loans, but this effect will last until the end of the year. Banks have obligations to shareholders, so they have to go for restructuring and concessions of business affected by the war, keeping their own stability as a priority.
In the near future, the National Bank will begin an assessment of banks’ stability in order to determine the current quality of the loan portfolio, assess the ability of banks to generate income in the future, determine the optimal approaches to further recapitalization if necessary and work with NPLs. Solvent banks with efficient business models will have enough time to recapitalize. This is a guarantee of the system’s ability to lend for demand recovery.
The key driver of lending in conditions of high risks of wartime is the access of banks and borrowers to state lending support programs, in particular to the program “Affordable loans 5-7-9%”. Recently, the terms of the program have been calibrated to reflect changing economic conditions and the market environment. The purpose of this update is to expand the range of financial instruments available to borrowers and at the same time to optimize the program budget by transitioning borrowers who are participants in the program to paying non-zero interest rates.
Ukrainian banks with foreign capital, whose parent institutions are still present in Russia, play a significant role in ensuring financial stability and supporting the economy of Ukraine. Since the beginning of the full-scale invasion, they have been supporting their clients with credit resources and convenient services, ensuring the operation of a large part of the banking infrastructure. At the same time, their influence on the decisions of parent institutions is extremely limited. In view of this, Ukrainian banks deserve support and should participate in the development of the banking sector, economic programs and humanitarian projects to ensure financial stability.
Plans of the National Bank to ease currency restrictions in the future
Introduction by the National Bank administrative restrictions since the beginning of the full-scale invasion was a forced move designed to preserve the stability of the foreign exchange market and protect gold and foreign reserves. During martial law, the NBU sold to balance supply and demand on the foreign exchange market more than 30 billion dollars. USAat the same time, the interventions of the National Bank would be significantly greater in the absence of measures to counter unproductive capital outflow.
Simultaneously, as reported, all administrative restrictions introduced by the NBU since the beginning of martial law are temporary. The National Bank realizes that over time the balance of advantages and disadvantages of the application of strict administrative restrictions undergoes changes: the deterrent potential decreases, while at the same time market distortions and dissatisfaction of market participants increase. With this in mind, one of the NBU’s priorities is the formation of the necessary prerequisites for a gradual easing of currency restrictions, which would not be accompanied by shocks to the currency market and the economy.
Within the framework of the new program of expanded financing from the IMF, Ukraine undertook to gradually ease currency restrictions after the normalization of the situation. The National Bank is working on a Roadmap for the gradual abolition of currency restrictions. The corresponding document will determine the priority of easing restrictions, taking into account the balance of advantages and disadvantages of their application.
The easing of temporary currency restrictions will be carried out according to the same principles that have proven effective during peacetime currency liberalization. This process will take place gradually and will not be tied to specific dates. When making relevant decisions, the NBU will focus on the presence of the necessary macroeconomic prerequisites and a thorough analysis of the impact of such steps on the currency market and the economy.
Strengthening financial monitoring requirements and wartime sanctions policy
Legislative changes in the field of financial monitoring are aimed at protecting the financial system of Ukraine from the actions of an aggressor and adapting Ukrainian legislation to FATF standards. In the new edition The Law of Ukraine “On Prevention and Combating the Legalization (Laundering) of Criminal Proceeds, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction” (hereinafter – the Law on AML/CFT) the list of clients for whom banks and non-bank institutions must establish a high risk of money laundering and financing of terrorism has been expanded. From now on, such clients include individuals and legal entities that have relations with the state that carries out armed aggression against Ukraine. Financial transactions of clients are also recognized as threshold if at least one of the parties – participants in the financial transaction has registration, residence or location in a state that carries out armed aggression against Ukraine, if they are carried out in the amount of UAH 400,000 or more (in equivalent).
The Ministry of Finance of Ukraine, with the participation of the National Bank, in accordance with the requirements of the new edition of the Law on AML/CFT, is currently improving approaches to determining the ultimate beneficial owners of legal entities. This will contribute to the detection of those companies that try to hide their connection with the aggressor country.
Decisions regarding the application of sanctions are made by the National Security and Defense Council of Ukraine, put into effect by the relevant Presidential Decrees, and are binding on all market participants.
In order to improve the procedure for the implementation of sanctions, the National Bank is preparing a draft of changes to the mechanism for the implementation of sanctions by banks and designated non-banking institutions, established by by the resolution of the Board of the National Bank of Ukraine dated October 1, 2015 No. 654 “On ensuring the implementation and monitoring of the effectiveness of personal special economic and other restrictive measures (sanctions)”.
Representatives of the National Bank are members of the Interdepartmental Working Group on Implementation of the State Sanctions Policy.
The National Bank will continue the practice of regular meetings with the heads of enterprises participating in surveys regarding their business expectations, and traditionally invites them to participate more actively in online surveys in the “Monthly Enterprise Surveys” mobile application. You can download it at Google Play and Apple Store.