Still a beginner’s market, Ukraine lacks the sophisticated financial instruments needed by banks and companies to hedge their risks, says Philippe Joannier, who chairs the management board at Ukrsibbank, owned by France’s BNP Paribas.
But while some new products will simply take
time to settle in, major changes will require a change in mentality from
both the monetary authorities and the man on the street.
“Liqudity is tight. Access to refinancing from the central bank is difficult. Interest rates on interbank market are quite high,” Francois Girod, head of capital markets at Ukrsibbank, listed the banking sector’s ailment.
The current monetary policy is a big burden, Joannier confirmed, but the lack of necessary instruments is also holding the sector back.
“The fact that a lot of instruments that we take for granted in other places, but that are lacking here, this has to have a repercussion,” Joannier said.
The forward market is a perfect example. Used by companies to sell or buy something in the future at a pre-agreed price, it is often used by traders to hedge against changes in currency or commodity price, making it a good tool to reduce risk of devaluation.
“The forward contract … was only introduced in the first half of 2011,” Joannier said. “And this is a product that has been existing for over 30 years – I was marketing forward contracts in Australia in 1975. It’s not exactly rocket science.”
“It’s a market that is only starting to grow. We see foreign currency forward operations (of) up to six months ( in the best of cases. We see large corporations, both local and international, looking at this market and looking to use it,” Girod said, noting that prospects of devaluation were holding back further development. Thus, importers looking to hedge find the tool too expensive, while those selling can cash in as long as their deals are concluded before the exchange rate slides.
“There are some limitations due to the context,” Girod summed it up.
But the lack of proper instruments is also a challenge for banks trying to manage an unruly market. Interest rate swaps that allow people to lock in fixed rate payments in exchange for varying ones (or vice versa), Girod argued, are a great tool for banks that have to juggle short-term deposits and long-term lending, as is presently the case.
“Managing the asset-liability balance of the bank is a challenge in a market where there are very few hedging instruments for interest rate risk and liquidity risk,” Girod deplored.
The retail sector could also benefit from some innovation. Credit cards are still not widely used, Joannier noted, nor are automatic transfers. Unlike in developed markets, people rarely automatically pay for utilities or different regular expenditures, and are thus constantly caught up in petty operations.
The key to Ukraine’s banking sector’s long-term development, however, is a change in mentality, Joannier noted.
“It’s a question of expectations. At this stage devaluation is not a certainty, but most people expect one. So it risks being a self-fulfilling prophecy. The rates will stay high until there is a devaluation, or there is a perception of another way of doing things – if you don’t let the hryvnia float than at least allow a controlled drift,” Joannier said.
While a clear message from Ukraine’s monetary authorities is badly needed, Joannier argued, ordinary people also have to adopt a different approach. Right now the strength of one’s currency is a question of national pride, Joannier noted, but that only means your exports are more expensive. As soon as people stop panicking about modest changes to the exchange rate, he said, those changes themselves will stop mattering as much – and the rates will start dropping.
Kyiv Post editor Jakub Parusinski can be reached at [email protected]
