Sorry, but fat cats are better than dead ones
Interview
A recent interview with former National Bank Governor Valeria Gontareva for NV Business attracted a lot of attention from the expert community. I could not resist joining the discussion.
First of all, I would like to confirm Valeria Oleksiyivna's opinion that the banking environment definitely appreciates the contribution made by the regulator to the cleaning up of the banking system under her leadership. There is no doubt about her expertise in macroeconomic and financial stability. However, in my opinion, there is also a certain misunderstanding of the current state of Ukraine, its economy and financial system.
The former NBU governor emphasizes in her interview: "although the war is even more terrible now, there were difficult moments then”. At the same time, in my opinion, the full-scale war has brought much greater challenges to all of us. Constant active hostilities, mobilization of millions, a demographic crisis caused by mass emigration, occupation of a significant part of the country, blackouts, shelling of all regions... The list goes on. The existence of the state itself was questioned at certain points. In 2014-2015, this was nowhere near the case. In my opinion, imposing recipes from a decade ago on the current situation will not achieve the desired result. Moreover, even at the beginning of the Russian-Ukrainian war in 2014-2015, the regulator did not do everything and not in the way it was seen from the economic theory. There is no advice in any book on how to act in the situation in which Ukraine and its financial system find themselves. I have no doubt that such textbooks will be written: on how to maintain the stability of the financial system during a major war. And they will be based on the Ukrainian experience.
I don't want to pay much attention to the debate over whether the NBU started cutting the key policy rate at the right time or not. This decision was based on thorough calculations. To comment on such actions, I need to analyze a large amount of information that I do not have. In addition, such decisions are not made by the regulator alone, but in a constant dialogue with foreign partners, without whose financial support our financial system would indeed face collapse. We are talking about governments and central banks of other countries, as well as such respected international institutions as the IMF, the World Bank, the EBRD, etc.
Regarding the impact of the high discount rate on business. Yes, it does affect business, but the high cost of the discount rate is not the biggest problem for it. Now, the shortage of staff due to the mobilization of key employees is coming to the fore. Constant power outages are also causing headaches. The number of consumers and potential employees is significantly decreasing due to the demographic crisis. The fact that entrepreneurs did not feel this high rate is partly due to the programs "Affordable Loans 5-7-9%", portfolio guarantees, support for exporters from the ECA, government and international grants. Businesses have successfully adapted to the current realities in terms of financing, but they cannot adapt to many other things caused by the war.
By the way, I would like to speak separately about “5-7-9”. Most meetings with small businesses begin with gratitude to the initiators of this program, and they end with the same gratitude. At one time, it helped entrepreneurs a lot. The program's impact on lending to small and medium-sized businesses is indeed great, but its impact on lending to large companies is clearly exaggerated. Large corporations can often provide loans themselves, because in times of uncertainty they do not risk investing in new investment projects and have free funds (the deposit portfolio of legal entities in Oschad grew at a frantic pace in 2023). Last year, more than half of the loans granted to new clients of the banking system were received outside the "Affordable Loans 5-7-9%" program. In the first quarter of this year, the repayment of previously disbursed loans exceeded the disbursement of new loans, which is the result of changes in the program. The share of loans under the "Affordable Loans 5-7-9%" program in the banks' gross operating hryvnia portfolio decreased to one third.
Now, as for the thesis that the exchange rate release and currency liberalization should have been done in 2022. Of course, when making decisions on this, the regulator also looks at the calculations and consults with partners. However, the success of these steps, unlike the decision on the key policy rate, depends on how citizens and businesses perceive these changes. It is easy to remove these restrictions, but it is difficult to implement them. No one would have guaranteed that the exchange rate would end up at, say, 60 hryvnia to the dollar instead of UAH 42.
This logic — a sharp abandonment of the fixed exchange rate — yielded unexpected results for the NBU in 2014-2015. I remember how the then president was very unhappy with the sharp jump in the exchange rate and demanded that the NBU stop the hryvnia's fall and keep it at UAH 13. That is why in November 2014, the NBU issued an explanation that the dollar exchange rate of UAH 12.95 was "economically justified". Similarly, the UAH 42 per dollar exchange rate has some economic justification. But, just like in 2015, the exchange rate eventually rose to much higher levels, despite anyone's economic justifications. It could rise in 2022 in the same way, under much more difficult conditions, in a state that is on the verge of survival. This is not a fact, but it is not impossible. What consequences could an uncontrolled devaluation of the national currency have? Truly terrible, much more tragic than the results of the devaluation of 2014-2015.
It is clear that over time, devaluation would have led to inflation, which would have made the already difficult situation of Ukrainians much worse. During wars, the poor always suffer the most, and in the event of a significant change in the exchange rate, the number of such poor, and thus the suffering, would have increased many times over. The army has been and continues to be greatly supported by volunteers who surprise the world and themselves with the amount of donations to strengthen the country's defense capabilities. Would Ukrainians be able to help the Armed Forces to such an extent if the currency were devalued? How could millions of refugees survive abroad if the exchange rate fell and they had no money for basic necessities? The answer to these questions is obvious. Similarly, the state would have lost the ability to finance its own defense procurement. And we remember that the Armed Forces of Ukraine needed almost everything: armor, weapons, ammunition, and fuel, which were bought for foreign currency then, as they are now.
Let's talk about the "fat cats" — banks. Indeed, in 2014-2015, there were no "fat cats" in Ukraine. Instead, there were many "dead cats". The bank collapse, the objective causes of which I do not question, caused the banking market to shrink — there are now three times fewer banks compared to 2014. A possible rapid devaluation would have continued this trend, and the banking market could have been reduced to, say, 20 banks instead of 63. Of these, state-owned banks would have 94% of assets, rather than 54% as they are now. I don't think this would be good for the economy in a full-scale war. I also don't see anything wrong with the fact that, as a result of the NBU's policy, banks (both state-owned and private) are now profitable and well capitalized. This means that they are ready to fulfill their function of providing credit support to businesses and individuals. Plus, they will continue to support the country's budget with their taxes, just like last year.
I can't help but comment on the statement that the NBU's unprofessional actions caused the state to lose UAH 200 billion. How can you not recall how in 2018, a dirty information campaign was launched against the former leadership of the regulator, one of the messages of which was that the NBU's actions caused 1 trillion in losses for Ukraine. I believe that both of these figures are of the same level of expertise.
In my opinion, the NBU's policy over the past year and a half has been prudent. The country was constantly living in conditions of uncertainty, delayed aid, a rapidly changing situation at the front, and constant bombardment of energy facilities, so the regulator could not take any drastic steps. I remember how at the beginning of this year we had a task to maintain financial stability without external support at least in January and February. And the country coped with it, even for a longer period. Liberalization is needed and is being implemented, but there is still uncertainty ahead. Therefore, it is necessary to hurry wisely.
As a result of the policy of government agencies, including the NBU, we have a stable situation in the financial sector. I think that the stress test for the effectiveness of the regulator's actions has been successfully passed. The NBU is not afraid to take responsibility and is gradually moving towards further reduction of the key policy rate and liberalization of the foreign exchange market using market mechanisms. We have low inflation, a currency market without excessive volatility, and reliable banks. Decisions are made in a balanced manner, and this gives the result that Ukraine needs to win the war.
Interview
Oschadbank Press Center