“Ukraine’s banking sector has been recovering after the boom and bust in the lending sector of 2005-2008, and is still on its way towards transitioning into a healthier, more stable state,” reads a recent report by Kyiv-based investment bank ICU.
Experts working in the field agree. Non-performing loans remain high, at more than 30 percent, according to the World Bank, with no drivers for a revival in lending in sight. Scarred by a 40 percent devaluation in 2008 that caused many Ukrainian borrowers to default on their hard currency loans, the government banned lending in foreign denominations to non-exporters.
At present analysts expect a rather gradual weakening of the hryvnia – to 8.5-9.5 by the end of next year. Six-month forward contracts, a commonly used benchmark to forecast exchange rates, have even dropped from around 9.5 hryvnia per dollar to 9.0, signaling some breathing space, according to investment bank Dragon Capital. Nonetheless, the population continues to exhibit a knee-jerk reaction to any whiff of currency weakness, so fears of a drastic slide are driving up rates.
“High rates on hryvnia facilities are mainly fueled by hryvnia depreciation expectations – households and businesses increasingly believe that hryvnia will become considerably cheaper in the coming months and choose to abstain from depositing hryvnia savings for more than two months,” explained Vitaliy Vavryshchuk, head of research at investment agency SP Advisors.
The current situation is hurting the sector’s prospects. The past year has been marked by a gradual retreat of Western banks, who have limited their retail operations in favor of more lucrative corporate ones, cut down on branches and staff and, as with Germany’s Commerzbank, pulled out of the market entirely. One reason are the problems at home: Europe’s ongoing debt crisis has pushed regulators to boost capital requirements, leading them to cut lending or even pull capital from their subsidiaries abroad.
According to a report by Austria’s Raiffeisen, the share of non-Russian foreign banks on the Ukrainian market has fallen from 40 percent in 2008 to 25 percent at the end of 2011, while Russian owned banks almost doubled their presence – from 7 to 12 percent…
But domestic factors are also playing a role. An economic slowdown mixed with uncertainty regarding Ukraine’s cooperation with the International Monetary Fund and gas negotiations with Russia has led many companies to delay investment plans.
Meanwhile, Ukrainian companies wanting to finance expansion projects or bolster their working capital have been hit hard by rates easily climbing past the 20-25 percent mark.
“Since the crisis began, the situation regarding not only the rates, but also the range of products, has considerably deteriorated,” said Oleksandr Slobodianyk, a former banker now working as chief financial officer at building material heavyweight Unigran. Previously large companies could tap bond markets or access cheap foreign financing, he said, but now one of the few options available are restocking loans backed by export crediting agencies.
The situation is particularly difficult for agricultural companies, which often need to tap banking credits to ensure smooth operations. While large players listed abroad are not feeling the squeeze smaller firms operating on the local market are struggling.
“It’s very expensive for most farmers, who reduce their expenditures to the minimum, delaying long term investments in machinery, cattle breeding and construction; large holdings listed overseas and exporting have a possibility to get loans in hard currencies twice as cheap,” said Jean-Jacques Herve, a specialist in agricultural financing at Credit Agricole.
He noted companies could find support by obtaining bank guarantees for payments to their suppliers, or entering into credit partnerships, linking farmers, suppliers and food industry. But this is not available to everyone. “Ordinary Ukrainian farmers have no access. They have few alternatives,” he summed it up.
Kyiv Post editor Jakub Parusinski can be reached at [email protected]
