NBU gives economy hard times

The anti-inflation campaign of Ukraine’s central bank will force companies to switch to barter he austere resource diet that the National Bank of Ukraine imposed on commercial banks in August and early September may drag in for several months. Though the balance on correspondent accounts of banks grew to UAH 15-16 bn by the beginning of last week (from UAH 9.4 bn in September 8), the banks will not be able to live on this money for long as the NBU plans to continue limiting the availability of hryvnia on the currency market to prevent speculation and curb inflation.

Indeed, the inflation in August to 8.9% slowed down in annual terms from 11.9% in June. "The central bank ensured a decrease in inflation pressure from excessive liquidity in the banking system, since it is known that excess money in the economy will eventually lead to an increase in the prices of consumer goods. Meanwhile, the NBU policies allowed for reducing an increase in demand," said NBU Governor Serhiy Arbuzov. Independent economists, however, assure that the measures of the NBU had little effect and that inflation and price growth only slowed down due to seasonal factors. "It is impossible to control inflation in Ukraine using monetary factors. Given that 60% of the country’s economy operates in the shadows, reducing the circulation of hryvnia cannot curb inflation," says President of the Ukrainian Analytical Center Oleksandr Okhrymenko. What the central bank can do taking advantage of the shortage of funds is maintain the stability of hryvnia. Foreign investors are reluctant to invest in Ukraine gauging their decision on warning signals of the IMF. After the lowering of Ukraine’s S & P sovereign ranking in the national currency, foreign investors grew cool on Ukrainian T-bills. As a result, there is no influx of hard currency into the country and the only way of stabilizing the value of the hryvnia is through its shortage.

However, such a policy of the NBU could deal a serious blow to Ukraine’s economy. In particular, it could precipitate a surge in industrial inflation and a slowdown in the growth of industrial output. The shortage of funds has already spurred the demand on the interbank exchange. Soon, this could lead to an increase in interest rates on loans for businesses, the demand for which traditionally soars towards the end of the year. "If the NBU continues its stringent monetary policy, the rise in the interest rates on short-term hryvnia deposits of up to three months will increase by 1-1.5 percentage points and loans will become more expensive for borrowers," says Anastasia Tuyukova, an analyst at Dragon Capital.

The scarce resources of hryvnia in banks also had an impact on the recovery of the domestic borrowings market as it paralyzed the demand for government and corporate bonds. The hopes of issuers of domestic bonds were dashed. "No issuers of bonds in Ukraine can count on attracting financial resources onto the domestic market. The situation will not change until the liquidity of the banking sector stabilizes," says Serhiy Fursa, a specialist of the Debt Securities Sales Department at Dragon Capital. In this case, companies have only two ways out: take out loans at exorbitant interest rates, which in the end will lead to a growth in manufacturers’ prices and eventually a rise in consumer prices, or forget about taking out a loan altogether. "The level of loan capital in Ukrainian companies is quite high compared to European companies. Strict monetary policy will lead to an increase in the cost of loan servicing for companies and consequently an increase in operating expenses, the burden of which in Ukraine is for the most part placed on the shoulders of consumers" says Erste Bank Chairman of the Board Pavlo Tsetkovskiy. Meanwhile, even now not every company can afford a loan and an increase in interest rates will narrow the circle of potential borrowers even more. Taking into account that the lion’s share of loans are taken out to increase the volume of working assets, companies deprived of the possibility to attract loans will have to deal with mutual settlements.

High interest rates and the low level of liquidity of banks can in the end slow down economic growth and lead to a decline in the volumes of investments in new production facilities, which even today are insignificant. On the other hand, the slowdown in the GDP growth is not likely to be that extreme. After all, despite the excess of hryvnia in the banking system at the end of 2010 and the beginning of 2011, the volumes of crediting of the economy by banks was negligible. Over eight months of the year, the credit portfolio of the corporate sector in the system grew by 11.2% or UAH 58 bn. This is precisely why economists are not in a rush to make new forecasts of GDP growth and are sticking to their cautions previous forecasts of 4.5%. The tight-fistedness policy of the NBU could pose a threat to the government’s plans for borrowings on the domestic market, thereby threatening the country’s economy with an increase in its foreign debt. The draft of the budget for 2012 currently being debated in parliament envisages a budget deficit of UAH 24.1 bn or 1.6% of the official forecast of the GDP. Moreover, financing of the deficit includes a net emission of the debt in the amount of UAH 32.6 bn, of which domestic liabilities will amount to UAH 10.1 bn and foreign liabilities - UAH 22.5 bn. "The government will manage to borrow this amount of money only on condition that the liquidity of the hryvnia considerably improves. However, we do not foresee any serious changes in this sphere, because for the better part of 2012 the NBU will most likely focus on stability of the national currency. As such, the government will have to rely, just as in 2011, on foreign borrowings," analysts at VTB Capital predict.