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NATIONAL BANK OF UKRAINE
Challenges for monetary policy and financial stability
Dmytro Sologub
Deputy Governor
National Bank of Ukraine
OeNB 78th East Jour Fixe
Vienna, 26 February 2016
NATIONAL
BANK OF
UKRAINE
Ukraine: Plagued by the textbook “triple crisis”
2
Macro crisis
Balance of payments crisis
Banking crisis
The situation in Ukraine is not unique:
Mexico (1994/95), Argentina (1994/95);
Thailand (1997), Indonesia(1997), Malaysia (1997), Philippines (1997);
Russia (1998); Turkey (2001); Ukraine (2009).
Run on deposits
Credit crunch
Hiking NPLs and losses
Capital erosion
Mounting bank failures
Severe growth
recession
Surging inflation
Widening budget deficit
Unsustainable CA deficit
Continuing capital flight
Severe confidence crisis
Exchange rate overshooting
1
2
3
2
NATIONAL
BANK OF
UKRAINE
Sluggish economic recovery is underway
The economy is clearly bottoming out, posting positive growth rates (qoq, seasonally adjusted)
for two quarters in a row. As a result, real GDP growth for 2015 as a whole came slightly better
than expected – around -10%
Consequently, business expectations are steadily improving
Regional growth picture remains uneven, as the Eastern regions were hit disproportionately
due to the proximity to the conflict zone and strong economic relations with Russia
3
Industrial Output by Regions, 2015, % y-o-y
Min -66.0
1 quartile -9.3
Median -5.1
3 quartile -1.7
Max 9.8
Ukraine -13.4
0
4.1
-1.4
-8
-34.7
9.8
-20.3
-4.7
-10.8
-7.3
-17
-66
-1.7
-8.9
-4.4
-4.3
0.5
-1.7
-7.6
-12
-2.2
-4.4 -9.4
-1.7
-8.9
Kyiv region
Chernihiv
Sumy
Kharkiv
Luhansk
Donetsk
Zaporizhzhia
Dnipropetrovs
Poltava
Cherkasy
Kirovohrad
Mykolaiv
Kherson
FEZ: Crimea
Odesa
Vinnytsia
Zhytomyr
Khmelnytskyi
RivneVolyn
Lviv
Ternopil
Ivano-Frankivsk
Chernivtsi
Zakar-pattia
-5.5
Kyiv
Source: State Statistics Service of Ukraine
50
60
70
80
90
100
110
120
130
140
150
-20
-15
-10
-5
0
5
10
15
20
II.2
00
6
IV.2
006
II.2
00
7
IV.2
007
II.2
00
8
IV.2
008
II.2
00
9
IV.2
009
II.2
01
0
IV.2
010
II.2
01
1
IV.2
011
II.2
01
2
IV.2
012
II.2
01
3
IV.2
013
II.2
01
4
IV.2
014
II.2
01
5
IV.2
015
GDP, % y-o-y BEI, % (RHS)
Real GDP growth and Business Expectations Index
Source: State Statistics Service of Ukraine; NBU
NATIONAL
BANK OF
UKRAINE
Inflation embarked on the steep downward path
4
Exchange rate stabilization, weak domestic demand, plunging global commodity prices and
prudent monetary and fiscal policies contributed to the strong and persistent disinflation trend,
emerged since mid-2015
On the other side, public inflation expectations remain elevated, which could be traced back to
the persistently high depreciation expectations and adaptive expectations’ structure (i.e. the
general public makes no difference between actual and expected inflation)
17,5
22,5
21,5
13,3
0
5
10
15
20
25
30
35
01
/13
02
/13
03
/13
04
/13
05
/13
06
/13
07
/13
08
/13
09
/13
10
/13
11
/13
12
/13
01
/14
02
/14
03
/14
04
/14
05
/14
06
/14
07
/14
08
/14
09
/14
10
/14
11
/14
12
/14
01
/15
02
/15
03
/15
04
/15
05
/15
06
/15
07
/15
08
/15
09
/15
10
/15
11
/15
12
/15
01
/16
Banks
Corporates
Households
Financial analysts
Source: NBU; GfK Ukraine surveys; NBU staff estimates
Inflation Expectations for the Next 12 Months, %
0,9
40,3
31,3
-8
0
8
16
24
32
40
48
56
6401
/20
13
02
/20
13
03
/20
13
04
/20
13
05
/20
13
06
/20
13
07
/20
13
08
/20
13
09
/20
13
10
/20
13
11
/20
13
12
/20
13
01
/20
14
02
/20
14
03
/20
14
04
/20
14
05
/20
14
06
/20
14
07
/20
14
08
/20
14
09
/20
14
10
/20
14
11
/20
14
12
/20
14
01
/20
15
02
/20
15
03
/20
15
04
/20
15
05
/20
15
06
/20
15
07
/20
15
08
/20
15
09
/20
15
10
/20
15
11
/20
15
12
/20
15
01
/20
16
Inflation Indicators, %
CPI, m-o-m
CPI, y-o-y
Core CPI, y-o-y
Source: State Statistics Service of Ukraine
NATIONAL
BANK OF
UKRAINE
External balance improved amid a sharp drop in imports and strong
official financing inflows
5
In 2015, exports fell dramatically amid continued falling prices on world commodity markets
and tensions with Russia
Imports declined even sharper, partially due to lower volumes of gas imports
External official financing and decline of FX cash outside banks were the main drivers for the
net inflows in financial account
The overall balance of payments posted a surplus of USD 0.8 billion in 2015 (in contrast to
USD 13.3 billion deficit in 2014)
0,0
-10
-8
-6
-4
-2
0
2
I.1
3
II.1
3
III.
13
IV.1
3
I.1
4
II.1
4
III.
14
IV.1
4
I.1
5
II.1
5
III.
15
IV.1
5
Source: NBU
Current Account Balance, USD bn
Secondary income
Primary income
Services (net)
Merchandise trade (net)
Current account balance
-0,7
-6
-4
-2
0
2
4
6
8
I.1
3
II.1
3
III.
13
IV.1
3
I.1
4
II.1
4
III.
14
IV.1
4
I.1
5
II.1
5
III.
15
IV.1
5
Source: NBU
Private sector
Public sector
Financial account
Financial Account: Net External Assets, USD bn
NATIONAL
BANK OF
UKRAINE
140
160
180
200
220
240
260
280
300
IV.2
012
I.20
13
II.2
013
III.2
01
3IV
.20
13
I.20
14
II.2
014
III.2
01
4IV
.20
14
I.20
15
II.2
015
III.2
01
5IV
.20
15
I.20
16
II.2
016
III.2
01
6IV
.20
16
I.20
17
II.2
017
III.2
01
7IV
.20
17
Grains Export Price, USD per t
previous forecast
current forecast
Source: own estimates
…but is to be hit by the sharply deteriorating terms of trade
2015 2016 2017
-19.5 (-14.2) -4.7 (5.5) 0.0
6 Data in the tables represents average price changes, % y-o-y
170
220
270
320
370
420
470
IV.2
012
I.20
13
II.2
013
III.2
01
3IV
.20
13
I.20
14
II.2
014
III.2
01
4IV
.20
14
I.20
15
II.2
015
III.2
01
5IV
.20
15
I.20
16
II.2
016
III.2
01
6IV
.20
16
I.20
17
II.2
017
III.2
01
7IV
.20
17
Imported Gas Price, USD per 1000 m3
previous forecastcurrent forecast
Source: own estimates
280
330
380
430
480
530
580
IV.2
012
I.20
13
II.2
013
III.2
01
3IV
.20
13
I.20
14
II.2
014
III.2
01
4IV
.20
14
I.20
15
II.2
015
III.2
01
5IV
.20
15
I.20
16
II.2
016
III.2
01
6IV
.20
16
I.20
17
II.2
017
III.2
01
7IV
.20
17
Ferrous Metals Export Price, USD per t
previous forecast
current forecast
Source: own estimates
30
40
50
60
70
80
90
100
110
120
IV.2
012
II.2
013
IV.2
013
II.2
014
IV.2
014
II.2
015
IV.2
015
II.2
016
IV.2
016
II.2
017
IV.2
017
Crude Oil Brent Price, USD per barrel
previous forecast
current forecast
Source: own estimates
2015 2016 2017
-28.8 (-24.6) -22.5 (4,3) 0.0
2015 2016 2017
-47.0 (-45.7) -41.9 (-3,7) 0.0
2015 2016 2017
-6.5 (-3.8) -30.7 (3.7) -4.3
NATIONAL
BANK OF
UKRAINE
The slide in EM currencies erodes the competiveness of the
Ukrainian economy
7
-4,7
-11,2
-11,5
-12,3
-21,7
-25,4
-26,2
-27,5
-33,9
-48,8
-52,9
-69,5
-86,6
-99,5
-1,3
-3,4
1,2 -0,8
-3,0
-1,5
-3,6
-2,7
-2,6
-1,6
-7,4
-13,9
-7,0
-2,9
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0
CNY
PLN
HUF
RON
RUB
TRY
MDL
GEL
ZAR
BRL
ARS
BYR
KZT
AZN
January 2016
2015
Source: Thomson Reuters Datastream
Emerging Market Currencies versus US Dollar (%
change, eop)
0,5
0,6
0,7
0,8
0,9
1,0
1,1
1,2
1,3
12
/99
12
/00
12
/01
12
/02
12
/03
12
/04
12
/05
12
/06
12
/07
12
/08
12
/09
12
/10
12
/11
12
/12
12
/13
12
/14
12
/15
Hryvnia REER Index (Based on Interbank Exchange Rate), Dec-1999=1
Source: IFS, NBU staff estimates (preliminary data)
NATIONAL
BANK OF
UKRAINE
8
The external position in 2016 is further damaged by the retaliation
measures by Russia and abolition of special import surcharge
Food exports to Russia almost stopped since January 1, 2016
Russia repealed the Free Trade Agreement with Ukraine since January 1, 2016. That resulted in
increase in imports duties to 5%-20% from 0% (average weighted – 7.7%). Also, Russia will be
able to implement additional quotas, bans and others non-tariff limitations
Losses of exports to third countries due to a transit ban through Russia’s territory estimated to
USD 0.46 bn. (calculations includes possible exports’ reorientation through the other routes)
-0,6
-0,5
-0,5 -0,1
-0,6 -0,1
-0,2
-2,5
-2,0
-3
-2,5
-2
-1,5
-1
-0,5
0
20
15
Ru
ssia
Tra
nsit
Import
surc
hag
e
EU
Volu
me
s
Prices
20
16
20
17
Actual forecast, USD bn
-0,3
-0,8
-0,3
-0,1
-0,5 +1.5
-0,8
-1,2
-3
-2,5
-2
-1,5
-1
-0,5
020
15
Ru
ssia
Import
surc
hage
EU
Oth
ers
Volu
me
s
Prices
20
16
Previous forecast, USD bn
NATIONAL
BANK OF
UKRAINE
9 9
NBU keeps tight monetary stance aiming at bringing inflation down
to 12% target by end-2016
Easing of the monetary stance, started in August last year, has halted recently amid the delay in IMF
program, elevated political risk and deteriorating terms of trade
To re-anchor public expectation from the exchange rate to price stability the NBU put a strong focus on
reaching 12% inflation target in 2016
At the same time, to manage pass-through effect from the exchange rate to prices, the National Bank
is trying to smooth exchange rate fluctuations by conducting FX interventions on both sides
Tight capital controls, introduced in 2014-2015, remain largely in place, as the prerequisites for the
removal have not been met yet
Inflation objectives
0
5
10
15
20
25
30
35
01
/14
02
/14
03
/14
04
/14
05
/14
06
/14
07
/14
08
/14
09
/14
10
/14
11
/14
12
/14
01
/15
02
/15
03
/15
04
/15
05
/15
06
/15
07
/15
08
/15
09
/15
10
/15
11
/15
12
/15
01
/16
02
/16
Overnight interbank IR
Discount rate
Overnight credit rate
Overnight deposit rate
IR on loans for up to 3 m.
18.0%
Source: CredInfo; NBU
24.0%
Overnight Interbank IR and NBU Policy Rate, % pa
(as of 19.02.2016)
22.0% 21.3%
NATIONAL
BANK OF
UKRAINE
Policy stance is conditional on the political and macroeconomic
developments
Scenario Results NBU actions
Base scenario GDP +1.1% +3%
CPI 12% 8%
Administrative
measures ↓
Key rate ↓
Pessimistic
- Escalation in the East
- Commodity prices ↓
- Impact of “Russian factor” ↑
- Political instability ↑
GDP ↓
UAH/USD ↑
CPI↑
Administrative
measures =
Key rate = ↑
Optimistic
- Commodity prices ↑
- Privatization ↑
- Structural reforms
GDP ↑
UAH/USD ↓
CPI↓
Administrative
measures ↓↓
Key rate↓↓
10
NATIONAL
BANK OF
UKRAINE
Disinflation (inflation target for 2016 – 12%)/Maintaining FX market stability
Successful implementation of the IMF program
Replenishment of international reserves
Gradual elimination of administrative measures
CURRENT TARGETS TO ACHIEVE:
Stage 1. Monetary targeting (framework of IMF
program):
accumulation of international reserves
targets on NDA, base money and NIR
flexible exchange rate
disinflation
Stage 2. IT lite:
price stability (1-digit target - 5%) as ultimate goal of
the NBU monetary policy
accumulation of international reserves
interest rate as a key instrument
Stage 3. Full-fledged IT:
price stability (CPI target 5%) as ultimate goal of the
NBU monetary policy
floating exchange rate
Future evolution of MP regime and goals
Establishment of NBU Board`s regular meetings on
Monetary Policy issues. Decision making process is:
• Clear and transparent
• Forward-looking
• Analytically supported
More transparent and market-friendly MP
instruments framework
Raising the role of key policy rate
Liquidity providing / absorbing auctions
Simplification of RR framework
Improved communication framework: Development of comprehensive
communication strategy
Revamp of NBU analytical product line,
including the publication of Inflation Report
Improvements that already done
NBU policy actions: Gradual transition to inflation targeting regime
11
NATIONAL
BANK OF
UKRAINE
Revamping the banking system Priorities in other sectors
NBU policy actions: revamping the banking system, liberalizing
capital account and transforming the central bank
12
Ensuring adequate capitalization of the banking
system:
conducting diagnostic studies and
stress-testing
sticking to the recapitalization schedule
Solving the related party lending problem
Addressing NPLs
Strengthening banking supervision:
improving early warning signal system and
implementing consolidated supervision
developing and implementing
macroprudential supervision tools
ensuring transparent banks’ ownership
structure
making thorough analysis of banks business
models
Foreign exchange liberalization:
cancelling the outdated Foreign Exchange
Regulation Decree and reducing the number of
regulatory acts in this field
liberalizing export of services
developing the long-term strategy of liberalizing
capital account
The development of cashless payments
(“Cashless economy” project)
An overhaul of Ukrainian securities market (jointly
with the National Securities and Stock Market
Commission) and setting up the efficient system
of integrated prudential risk based supervision
(“Risk based supervision”)
The continuation of internal transformations
aimed at implementing the NBU’s vision,
mission and values, and, also, enhancing the
efficiency of internal processes, and
implementing ‘the process management’
Implementation of electronic document circulation