Panel Discussion with the National Bank and IFIs. 11th Annual Ukraine Investor Conference

Below please find highlights from the keynote speeches delivered by Valeria Gontareva, Governor, National Bank of Ukraine, Ivan Miklos, Member of Parliament, former Minister of Finance, Slovak Republic, Jerome Vacher, Resident Representative in Ukraine, IMF, Nicholas Burge, EU Delegation to Ukraine, Sevki Acuner, European Bank for Reconstruction and Development at the Panel Discussion with the National Bank and IFIs.

Dragon Capital held its 11th Annual Ukraine Investor Conference on Feb. 17-18 in Kyiv. Despite the country’s tense security situation and economic challenges predictably affecting investor sentiment, the conference was attended by over 100 international investors as well as about 200 local investors and Ukrainian companies.

Below please find highlights from the keynote speeches delivered by Valeria Gontareva, Governor, National Bank of Ukraine, Ivan Miklos, Member of Parliament, former Minister of Finance, Slovak Republic, Jerome Vacher, Resident Representative in Ukraine, IMF, Nicholas Burge, EU Delegation to Ukraine, Sevki Acuner, European Bank for Reconstruction and Developmentatthe Panel Discussion with the National Bank and IFIs.

• Ms. Gontareva said the government’s 2015 macroeconomic forecasts envisage a real GDP decline of 5.5% y-o-y, core inflation of 18-19% and headline inflation of 24-26%, with the difference attributable to planned increases in gas and heating prices for households of 280% and 66%, respectively, as part of Ukraine’s commitments to the IMF under the new lending program.

• The NBU also forecasts a smaller C/A deficit of 1.0% of GDP this year (vs. 4.0% in 2014 and 8.7% in 2013), and expects the financial account to run a surplus on inflows of official financing (over $8.0bn from the IMF, $2.0bn under U.S. guarantees and inflows from other official creditors). This would cover Ukraine’s financing needs in 2015 and help replenish gross international reserves to $17bn by end-2015. An additional $5bn of relief is expected from the debt operation with sovereign debt holders.

• The Governor believes that the ongoing banking system cleanup is in its final stage. The estimate of additional capital needs for the 35 largest banks, identified based on mid-2014 stress-tests, has declined to UAH 47bn from UAH 66bn due to three banks going into receivership. More than half of this amount (57% or UAH 27bn) has already been injected into the system, with the program due to be completed by mid-2015. State-owned banks have received UAH 18bn (incl. Oschadbank with UAH 11.6bn and Ukreximbank with UAH 5.0bn). However, the mid-2014 stress tests were based on a 2013 asset quality review and did not include UAH devaluation and the subsequent loss of territory and real assets by Ukraine. The NBU will recognize banking system losses and develop a program to reach a CAR of 10% for the system within four years (in coordination with the IMF).

• Last year the Bank started a radical internal reform by halving its expenditures, announcing a 50% cut in personnel in 2015 (to reach 80% by 2017) and reorganizing its regional offices.

• Ms. Gontareva confirmed the Bank’s strong commitment to the new IMF program.

• Mr. Vacher commented that the new IMF program is ambitious yet realistic, and could become a turning point for Ukraine if implemented effectively.

• The Fund sees a strong chance for the new program to succeed. Firstly, the authorities show a strong commitment to reforms, including through the fiscal discipline demonstrated last year (deficit reached 4.6% of GDP vs. 5.5% target), switch to a flexible exchange rate regime and launch of energy sector reforms. Secondly, the new program envisages a number of front-loaded reforms, namely (i) further energy tariff hikes aimed at achieving cost recovery by spring 2017, (ii) corresponding compensation via increasing subsidies to households; (iii) measures on bank restructuring and state-owned enterprises, and (iv) anti-corruption agenda.

• Thirdly, this program is accompanied by increased external support from official donors, which will cover Ukraine’s financing needs over the next four years. Additionally, Ukrainian authorities are planning debt consultations aimed at improving medium-term debt sustainability.

• Mr. Miklos said the new IMF program is an inevitable minimum for Ukraine, adding that deeper and much quicker reforms are needed to achieve macroeconomic stabilization and fiscal consolidation. He noted that in the fiscal consolidation process, decreasing the share of public expenditures to GDP is more important than cutting the budget deficit (last year, public spending in Ukraine topped 50% of GDP compared to below 40% in peer countries). Also, a strict and transparent system of national accounting is crucial for monitoring the real situation in the fiscal sphere.

• Mr. Miklos expressed his conviction that from both the economic and political standpoints, a one-step hike in energy tariffs is more effective in terms of achieving macroeconomic stabilization and fiscal consolidation than a 2-3-step adjustment. 

• Mr. Burge noted that the ambitious package of reforms envisaged by Ukraine’s Association Agreement with the EU is fully in line with those discussed in the new IMF program. He added that in order to implement these reforms, a number of fundamental issues have to be addressed, namely reaching peace and macroeconomic stability, tackling corruption and reforming the judicial system.

• Mr. Acuner said that out of the $5.0bn pledged by the EBRD to Ukraine as part of a financial package from official donors, $1.2bn was committed last year. He expressed concern that the authorities’ main focus is currently on the macroeconomic issues and they overlook the microeconomic level.

• Mr. Acuner stressed that a properly functioning banking system is necessary to foster the development of private enterprises, which can be achieved by establishing a transparent regulatory structure, clear governance principles, and phasing out related-party and directed lending. He also noted that coherent and broad economic strategies should be developed for each key sector of the Ukrainian economy.