Challenges for monetary

policy and financial stability

Sergiy Nikolaychuk

Director of Monetary Policy and Economic Analysis Department

85th East Jour Fixe of the Oesterreichische

Nationalbank in cooperation with the National

Bank of Ukraine

12 September 2019

Monetary policy is committed to bring inflation to 5% target

Headline CPI, % yoy

Source: NBU Inflation Report, July 2019.

0

2

4

6

8

10

12

14

16

18

IV.16 II.17 IV.17 II.18 IV.18 II.19 IV.19 II.20 IV.20 II.21 IV.21

Tolerance bands Target CPI

ForecastMonetary policy

horizon

2

… via monetary conditions consistent with planned disinflation

3

0

4

8

12

16

20

IV.17 IV.18 IV.19 IV.20 IV.21

30%

50%

70%

90%

confidence

intervals

Key rate (%) and uncertainty

Source: NBU Inflation Report, July 2019.

Tensions in the financial sector are gradually declining

4

Financial Stress Index

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

05.08 11.08 05.09 11.09 05.10 11.10 05.11 11.11 05.12 11.12 05.13 11.13 05.14 11.14 05.15 11.15 05.16 11.16 05.17 11.17 05.18 11.18 05.19

Lehman Brothers bankruptcy

Outset of crisis in Ukraine

IMF-sponsored anti-crisis laws

Unrests on Hrushevskogo

str., KyivPresidential elections in

Ukraine

Escalation of military

Switch to flexible FX rate

Launch of talks on Ukrainian

external debt reprofiling

Agreement on reprofiling

or external debt

Privatbank

nationalization

Worsening EU debt crisis

Initial agreement

on IMF terms

Insolvency of Delta bank

Russion armed agression

in the Kerch Strait

Source: NBU.

Risk map for banking sector

Credit risk (const). Debt burden on households isrelatively low. New consumer loans are of better quality.Credit risks of corporate sector are slowly subsiding,banks lack high-quality borrowers.

Capital adequacy risk (const). Sector is adequatelycapitalized for an eventual crisis. Capital adequacy ratioat two SOBs is close to minimum requirements. Dividendpayouts are raising risks.

Liquidity risk (const). The inflow of retail deposits issignificant. Short-term liabilities are a medium-term risk.Banks comply with LCR requirement and therefore canmeet their obligations even under stress conditions.

Legal risk (+1). A number of controversial court rulingson PrivatBank bail-out pose additional risks.

FX risk (const). Dollarization rate of assets and liabilitiesis high. However, open FX positions of banks do notpose risks to them. There will be no FX market volatility ifcooperation with the IMF resumes quickly enough.

Profitability risk (-1). Sector profitability exceeds priorNBU expectations and provisioning is limited. Operatingperformance of SOBs has somewhat improved. Highprofitability is to persist over the next quarters

5

0123456789

10credit risk

capitaladequacy

risk

liquidity risk

legal risk

FX risk

profitabilityrisk

June 2019 December 2018

Source: The NBU Financial Stability Report (June 2019).

The Ukrainian economy has been recovering steadily at a solid

pace despite military conflict and other headwinds

GDP, qoq change, % (seasonally adjusted)Contributions to Real GDP Growth, pp

Source: SSSU; NBU estimates and forecast (July 2019 IR).

6

-6

-4

-2

0

2

4

6

I.10 I.11 I.12 I.13 I.14 I.15 I.16 I.17 I.18 I.19

IT from 2016

SD* = 1.1SD = 0.5

* SD - standard deviation

Fixed ER

crisis

2,4 2,53,3 3,0 3,2 3,7

-8

-6

-4

-2

0

2

4

6

8

10

2016 2017 2018 2019 2020 2021

Consumption Investment

Net exports Inventories

GDP

Challenge #1. Threats to the independence of central bank

Government bonds in the NBU`s portfolio,

UAH bn

Source: NBU.

Public sector deficit, UAH bn, and public debt-to-

GDP ratio, %

Source: MFU, SSSU, NBU calculations and forecast

(Inflation Report July 2019).

0

20

40

60

80

100

0

50

100

150

200

250

2010201120122013201420152016201720182019

Bank recapitalization & other

Naftogaz

General government deficit

Public debt, % of GDP (RHS)

0

50

100

150

200

250

300

350

400

2008 2014 2020 2026 2032 2038 2044Inflation-linked

Longterm fixed-income

Previous issues (before reprofiling)

7

Implementation of best practice in communications helps to

preserve the independence

2015

2016

2018

2019

1998

2000

2008

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

2013 2014 2015 2016 2017 2018 2019

Mo

ne

tary

Po

licy T

ran

sp

are

ncy In

de

x

+5 points (from 9 to 14)

in 11 years (from 1998 to 2008)

+10 points (from 3.5 to 13.5)

in 5 years (from 2014 to 2019)

IT Adoption

IT Adoption

(de facto)

Ukraine

Czech Republic

+0,5 IR forecast publication

8

Challenge #2. Migration

Net Wages in Main Destination Countries for

Migrants relative to Wages in Ukraine, %

Productivity and staff real wage indices, seasonally

adjusted, Q1 2010=100

Source: SSSU, NBU staff estimates.

50

70

90

110

130

150

170

190

I.03 I.05 I.07 I.09 I.11 I.13 I.15 I.17 I.19

Labor productivity

Real wages (deflated by CPI)

Real wages (deflated by GDP deflator)

Source: SSSU, NBU staff estimates.

100

300

500

700

900

1100

1300

1500

1700

2013 2014 2015 2016 2017 2018

Poland RussiaItaly Czech RepublicGermany

9

Challenge #3. External vulnerabilities

Gross International Reserves and

Adequacy Criteria , %

Source: NBU.

0

50

100

150

200

250

300

350

400

0

5

10

15

20

25

30

35

40

2008 2010 2012 2014 2016 2018 08.19

In months of future imports (normalized to 3m), RHS

As a ratio to 20% of broad money, RHS

As a ratio to short-term debt, RHS

As a ratio to composite IMF measure, RHS

net international reserves

10

NBU’s FX Interventions* and

exchange rate

* As of 09.09.19

Source: NBU.

0

5

10

15

20

25

30-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

I.08 I.09 I.10 I.11 I.12 I.13 I.14 I.15 I.16 I.17 I.18 III.19

Ratio of interventions to gross reserves, %

UAH per USD (end of quarter, RHS, reverse order)

Challenge #4. High Non-Performing Loans (NPLs)

The NBU approved a regulation #97

on NPL resolution, which encourages

banks to set a clear time frame for

decreasing the volumes of these

exposures

The government is expected to issue

an additional decree that will govern

the handling of nonperforming

exposures by state-owned banks

The new supervisory boards of these

SOB are expected to deal with this

issue as their top priority

11

0% 10% 20% 30% 40% 50% 60%

World

EU

ECA*

Russia

Ireland

Belarus

Italy

Moldova

Greece

Ukraine

* Europe and Central Asia (excluding high income) as of

1 January 2018, Ukraine as of 1 January 2019.

Source: World Bank, NBU.

NPL ratios*

Challenge #5. Structural rigidities and supply-side constraints

12

7133

0 50 100 150 200

Dealing with Construction…

Getting Credit

Paying Taxes

Starting a Business

Enforcing Contracts

Registering Property

Protecting Minority Investors

Trading across Borders

Getting Electricity

Resolving Insolvency

globalRank

Poland

Ukraine

Ease of Doing Business ranking 2019

Source: World Bank.

TOP-5 major obstacles to foreign investment in Ukraine

Conclusions

Ukraine’s economy embarked on the recovery path in 2016, thanks to improved macroeconomic

management, strong support from donors, and a favorable external environment. Despite all the

challenges and headwinds during the year of dual elections, economic activity keeps growing at a

solid pace

The longer-term prospects of the economy strongly depend on the realization of key structural

reforms, which have to tackle major weaknesses such as the poor business climate, unfavorable

demographics and deteriorating infrastructure

Disinflation successfully proceeds, but its speed is altered by idiosyncratic shocks, further

adjustment of administered prices and recovering wages and domestic demand. Tight monetary

policy will ensure inflation falls back into the target band over the forecast horizon

Fiscal and external sustainability have improved remarkably over the last few years, but risks

remain amid threats of full-scale global trade war and global recession

NBU policy efforts continue to focus on securing price and financial stability, revamping the

banking system and liberalizing the capital account

13

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