ICPS macroeconomic forecast: positive and negative trends in the Ukrainian economy
The International Centre for Policy Studies has prepared another analytical publication “Economic Analysis and Trends” for August 2018. It contains a detailed analysis of indicators of the manufacturing sector, prices, financial markets and the forecast for 2018-2020 on the development of the Ukrainian economy. According to the analytical paper, the second quarter of 2018 was characterized by the following trends: Growth of GDP accelerated to 3.6%. There were higher rates of growth in agriculture (due to early harvesting), energy sector and passenger transport. In July, after two months of zero inflation, deflation occurred. Annual inflation further slowed down to 8.9%. In July, the rapid growth of the hryvnia balance of loans of the population restored. Residues on household hryvnia deposits decreased. The forecast part states that the second half of 2018 will be characterized by the following trends: Negative Decrease in private consumption growth. A moderate devaluation of the hryvnia will occur. The price of gas for the population will rise significantly. Growth in industries, in particular retail and passenger transportation, will be lower. Positive Acceleration in agriculture should occur due to the high expected yield of late crops. The dynamics in the food industry will be improved. The level of inflation will not be much higher than the upper limit of the target corridor (8%), despite the devaluation and the expected increase in gas prices for the population. The document is available in Ukrainian as well as in English. Please contact us for more information, ordering, previewing the release, and getting acquainted with the terms of subscription: e-mail: email@example.com tel. (044) 253-22-29, (068) 831-94-69
Ukrainian migration: what our neighbors should expect?
Emigration has become one of the main tendencies and problems of Ukraine in recent times. This phenomenon has become a consequence of domestic difficulties in the country and a lack of faith in the improvement of economic prospects. In addition, Ukrainian migrants are also affecting the neighboring countries, which may lead to asymmetries in their labor markets and to other negative consequences. Therefore, it is necessary to assess the scale of migration of the Ukrainian workforce and the prospects for such a process, both for Ukraine and for the "hosting" countries. Situation analysis According to the latest information from the Ukrainian State Statistics Service, the number of migrant workers reached 1.303 million in 2015-2017. The share of labor migrants in the total population amount is 4.5%. Compared to the years 2010-2012, this indicator has increased by almost 10%. The main countries that "import" our labor force are Poland (38.9%), the Russian Federation (26.3%), Italy (11.3%), the Czech Republic (9.4%). In general, personnel with vocational education (33.9%) and complete secondary education (30.1%) are leaving Ukraine. Only 16.4% of migrants have complete higher education. 26.8% of the total amount of migrants worked according to the qualification; 29.5% worked in other field than the obtained qualification; 36.1% worked at a job that did not require qualification. It is seen that the percentage of low-skilled labor is rather high: the countries "filled" the niche of low-skilled labor with Ukrainian personnel: 41.6% of migrants are employed in the simplest professions. The percentage of employment in other professions is rather low (exception: skilled workers with tools - 25,9%). It should be noted that the Ukrainian State Statistics Service provides data based on a sample survey of the population (households) on labor migration and figures may differ from the actual ones. What are we facing? The increase of labor migration will have the following consequences: For Ukraine For hosting countries Negative consequences: Negative consequences: • labor market asymmetries, a change in the balance of highly skilled and low skilled personnel • "rising price" for the domestic labor market • importing the labor resources from abroad • additional expenses of the country for the education of new specialists • "aging" of the nation • lower production rates in the country • increased competition with the local population • higher probability of rising unemployment • conflicts, cross-cultural misunderstandings may appear • increased risks of illegal migration • local labor force begins to seek for job opportunities in other countries, asymmetries of the market arise Positive consequences: Positive consequences: • increase of money transfers from labor migrants • reduction of unemployment in the domestic market • part of the workforce returns with new knowledge and experience • the inflow of migrants fills unclaimed jobs • migrants do not need to be educated • "imported" labor force accelerates economic development • foreign workers reduce the average market wages • migrants stimulate consumer demand Under conditions of insufficient growth of production and the existence of unemployment, emigration does not create significant threats. Accordingly, the current shortage of personnel in Ukraine due to emigration is still subcritical: • Labor market is “overcrowded” due to insufficient growth of the Ukrainian economy (correspondingly, due to small supply of jobs). • A significant number of migrants are residents of the eastern regions, in particular from the territories of the ATO, to whom the Ukrainian market and state can not provide the necessary employment. • The share of emigrants who have left Ukraine permanently is covered by immigrants. In particular, according to the State Migration Service of Ukraine, 264,732 immigrants are registered by the end of 2017. • Despite the fact that the scale of migration is quite large (even according to the official data), it should be noted that it has a seasonal nature. The share of labor emigrants in the total population is less than 5%. According to the Ukrainian State Statistics Service, the share of migrant workers returning to Ukraine is 43.2%, the share of short-term migrant workers is 48.5% and emigrant workers is 8.3%. At the same time, although money transfers of migrants only partially cover the losses of our economy due to the outflow of labor force, in the current situation, the transfers of migrants even exceed foreign direct investments in dollar equivalent. According to the NBU, the volume of money transfers to Ukraine decreased by 4.4% in 2017, however it still amounted up to almost $2.378 billion. On the other hand, though basically low-skilled labor force leaves Ukraine seasonally, there is also a sufficient share of highly skilled emigrants. This situation worsens the asymmetry of the Ukrainian labor market and is really critical. Accordingly, the current threat to the Ukrainian economy is the outflow of highly skilled employees. In addition, continuation of the process of other kind of personnel leaving will also affect the country's economic security in long term. Even today, there is a shortage of employees in the sectors of Ukraine that are dynamically developing (where the largest number of vacancies is open and where it cannot be filled by appropriate personnel for a long time). Nowadays, Ukraine needs technicians, directors, managers, skilled workers with tool, personnel for equipment and machinery maintenance, operation and control. The largest number of opened vacancies is in the spheres of sales and trade, service, labor specialties and manufacturing. In turn, the outflow of younger generation, the aging of the nation, and the decrease in the number of economically active population (by almost 6%) are weakening the preconditions (resources) for the future rapid economic growth. At the same time, the Ukrainian economy needs to grow more dynamically, taking into account the chosen course of rapprochement with the EU countries. However, the economic gap is only increasing annually. Thus, it is difficult to break the vicious circle of "migration and the lack of economic prospects" and it will be even more difficult to do it in the future. Is there a way out? According to the Ukrainian State Statistics Service, about 40% of employees receive a minimum wage or near to it today (the minimum wage is formally received by 10% of full-time employees). In confirmation, about 46.2% of the total number of households in the country received subsidies for reimbursement of expenses for housing and communal services in 2017 - this is 10.3% more than in 2016. Accordingly, this is a characteristics of the employment situation in Ukraine. This is facilitated both by the personal qualities of individuals, that influence professional achievements, and the established "traditions" among the employers: non-fulfillment / absence of the norms of social corporate responsibility, the desire to save, underpay, earn quickly and the small share of the employee salary in the price of goods / services. Thus, besides basic, it becomes impossible to meet the other needs. Taking the above stated into account, higher wages, especially in the neighboring countries, stimulate the migration of Ukrainian labor resources. Moreover, foreign companies and countries are interested in attracting the external, especially highly skilled, personnel, because they do not spend money on their education. Meanwhile, there will be no major changes in the labor market and migration processes: all the tendencies will remain the same. The rates of personnel outflow from Ukraine will depend on economic (mainly on wages and purchasing power of hryvnia) and non-economic factors (social, cultural, security factors, etc.). The financial conditions of citizens, their needs, the policy of neighboring countries regarding the employment, etc. will be determinative. In other words, in Ukrainian realities, only economic stimulus is capable of keeping personnel on its territory. According to the NBU's commentary, labor migration will grow several years before wages rise to the required level. At the same time, it should be noted that the growth of nominal wages in Ukraine is significantly overtaking the real: its required level will be difficult to achieve in the near future. Given the growing number of Ukrainian migrants and the possibility of increasing the negative consequences not only for Ukraine but also for hosting countries, we should pay attention to the following: • The idea of signing bilateral agreements on labor and migrants has a great potential, taking into account the diversification of opportunities and experience. In addition, it is likely to reduce the number of "uncontrolled" migration and, thus, countries will be "ready" for changes in the labor market and labor flows. • Under today's conditions, taking into account the main directions of Ukrainian budget expenditures, the labor market and its support remain without attention. Therefore, a clear strategy of the state is necessary, including the stimulation and support of economically active population, the creation of targeted programs for country development, business development, provision of specialists and education of the necessary personnel. • Focusing on products with greater added value, further ensuring economic growth and stimulating wage growth in line with economic growth, increasing the share of labor in product prices, further implementation of corporate social responsibility practices, providing white wages, social welfare packages, re-training, etc. In long term, stabilization of the situation and crisis-free development will allow young professionals and labor resources to feel confident in their country and its support that will slow down the outflow of personnel from Ukraine and prevent negative consequences for the neighboring countries. Unfortunately, at the moment there is no effective strategy and cooperation on labor migration. Instead, only the talks are being heard from the Ukrainian side and active preparations for the elections are taking place.
Privatization 2018: vital need or usual habit?
At the end of May - early June, the Ukrainian government announced the final list of small and large privatization objects. According to the acting head of the State Property Fund Vitaliy Trubarov, such list of enterprises for sale is the largest for the last 10 years. Is the abovementioned thesis really an "achievement of the government", what prospects and risks of such "comprehensive" privatization? What do we have In recent years, the announced privatization of 2018 has the most ambitious plans. Budget revenues from privatization in the current year are projected at the level of 22.5 billion UAH. The key features of the privatization in 2018 are the following: ● In January 2018, the list of enterprises for privatization did not exceed 335 objects. Later on, the list of privatization was broadened, firstly reaching 576 objects, and then - more than 700 objects. ● Small privatization. The list includes 716 objects and is divided into: 1) enterprises based on the combination of property of various forms of ownership; 2) single property complexes of state enterprises and their structural subdivisions; 3) separate property; 4) objects of unfinished construction; 5) objects of social and cultural purpose. The privatization process will take place exclusively through electronic auctions. ● Large privatization. The list for privatization was reduced from 26 to 23 enterprises. The Aluminum Foil Factory, the Agrarian Fund and the State Food and Grain Corporation of Ukraine were removed from it. Auction on sale of large privatization objects will have the following features: 1) in the absence of the second participant, the auction will not be held, and will automatically be considered to be not occurred; 2) the participants are obliged to make at least one step of bidding to exclude collusion attempt; 3) the information about the auction participants and their amount are not the subjects to be disclosed before the auction starts; 4) in the case that there is only one participant, a ransom is made at a price not lower than the starting one; 5) if during the auction with raising price sale, so-called British auctions, the object is not sold, a decision is taken to reduce the starting price by 25%; if this attempt is useless, then the price is reduced by 50%. If the object of privatization is not sold in the above-mentioned ways, a decision is made to sell it at auction by the method of studying price offers. ● The list of those who cannot be a buyer have been broadened by the representatives from the Russian Federation and by the persons under sanctions. ● The list of objects that are not a subject to privatization was also broadened: medical institutions and educational institutions have been added to it. ● The Cabinet of Ministers of Ukraine has refused to privatize or lease ports, they will be transferred exclusively under concession. Situation analysis At present, there are 3444 objects in state ownership. Table. Distribution of state-owned objects Type Number of state-owned objects, units Assets, billion UAH Percentage ratio, % Strategic objects 15 1175 69 Important objects 363 147 8,6 Objects with control lost 559 45,1 2,6 Inactive objects 1255 132,6 7,8 Concession (airports, forestry, highways) 359 14,5 0,9 Others 893 189,4 11,1 Total 3444 1704 100 Source: According to the Ministry of Economic Development and Trade of Ukraine The Ukrainian government plans to gradually reduce the number of state-owned objects and intends to leave only 15 particularly important state-owned enterprises and 363 objects that ensure the state's fulfillment of its functions. The list of 15 particularly important enterprises that should remain state-owned include: Ukrzaliznytsia, Ukrposhta, Naftogaz Ukraine; strategic enterprises of the aerospace industry - CB Yuzhnoye, Plant 410, Yuzhmash, Antonov, Khartron, Kharkiv Aviation Plant; Administration of seaports; energy companies - Energoatom, Ukrenergo, Ukrhydroenergo, Eastern Mining and Processing Plant; Ukrchimtransamiak. In addition to privatization, 359 objects are also planned to be transferred under concession. Despite the proclaimed goals of protecting strategically important enterprises, the analysis of previous documents, in particular the Resolution of the Cabinet of Ministers of Ukraine # 83 on March 4, 2015 "On Approval of the List of State Property Objects Strategically Important to the Economy and Security of the State", showed that a large the number of objects in this year "stopped to be" strategically important: 14 out of 23 companies included in the list are strategically important for the Ukrainian economy, in particular chemical industry enterprises. Table. Large privatization objects to be privatized in 2018 Code according to USREOU Name of the object The proportion of shares, % Strategic value (2015) Energy industry 22927045 PJSC "Tsentrenergo" 78,289 + 00130725 OJSC "Ternopiloblenergo" 50,999 + 00130926 PJSC "Zaporizzhyaoblenergo" 60,2475 + 00131954 JSC "Kharkivoblenergo" 65,001 + 23399393 JSC "Nikolaevoblenergo" 70 + 22767506 PJSC "Khmelnytskoblenergo" 70,0089 + 00131771 JSC "Kherson Teploelektrocentral" 99,8328 00130820 JSC "Dniprovskaya Teploelektrocentral" 99,9277 00130850 PJSC "Kryvy Rih Teplocentral" 99,9864 00131050 State Enterprise "Severodonetsk Teploelektrocentral" - Mining industry 36716128 PJSC "United Mining and Chemical Company" 100 + 31599557 State Enterprise "Coal Company "Krasnolimanskaya" - Machine and instrument making 30832888 PJSC Azovmash 50 05762269 JSC "Turboatom" 75,2241 + 00213121 State Enterprise "Plant "Electrotyazhmash" - + 32495626 State Enterprise "Dniprovsky Electroconstruction Plant" - + Chemical Industry 05766356 PJSC "Sumykhimprom" 99,9952 + 00206539 PJSC "Odessa Port Plant" 99,5667 + 38983006 Zaporizhzhya Titanium-Magnesium Combine Ltd. 51 + Manufacturing industry 05743160 OJSC "Oriana" 99,9988 Health, culture and sports 30058128 PJSC "President-Hotel" 100 21680915 PJSC "Indar" 70,7016 + Agricultural industry 30401456 State Joint-Stock Company "National Joint-Stock Company "Ukragroleasing" 100 What will we have? The privatization "successes" of the previous years show that the achievement of the goals set by the government will be complicated. Even though the government expects to receive the largest sum from privatization-2018 in the amount of 22.5 billion UAH in the last 10 years, the new consensus forecast of the Ministry of Economic Development already speaks of the probability of receiving only 1.25 billion UAH, which is twice lower of the amount of privatization sum in 2017. Accordingly, there is a risk of non-fulfillment of the revenue part of the budget, which is planned at the level of 913 billion UAH, by 2-3%. Table. Implementation of the privatization plan in 2014-2018 Year Plan, billions UAH Fact, billions UAH Plan fulfillment, % 2014 0,335 0,466 139,1 2015 17 0,151 0,9 2016 17,1 0,188 1,1 2017 17,1 3,4 19,9 2018 22,5 - - In turn, the following factors will contribute to the reluctance of investors to participate in the privatization-2018: ● Technical barriers to tenders and complexity of procedures ● Weak institutional capacity of the State Property Fund of Ukraine ● Limited competition and access to trading ● Significant dependence of enterprises on government decisions and the actions of the oligarchs ● Political and lobbyist games around enterprises ● Complicated "debt history" of enterprises and their unsatisfactory financial condition ● Pre-election turbulence ● Situation in the east and the risks of nationalization Thus, the interest of investors will depend directly on how the sales will be organized. Despite the fact that the privatization process will be quite transparent, a number of barriers remain: for example, there may be technical restrictions on trade access or price manipulations at bidding. And even if a diligent investor buys such enterprise, conditions can be created under which he will not be able to pull the company out of poor financial state. Therefore, the privatization plan of this year is unlikely to be fulfilled, due to foreign and Ukrainian investors are not in a hurry to invest in Ukraine without knowing how the development vector will change with the election of a new president and parliament. In addition, some investors are afraid of the threat of nationalization of purchased objects, remembering what happened to Privatbank. The results of the bidding can easily lead to a situation where "they sell for themselves" and, moreover, at low price. This is evidenced by the fact that biggest part of trades is planned to be held in fall and actually may begin much later with the aim to quickly sell the objects, fearing the arrival of the big investors. In turn, even if this "enlarged" privatization campaign succeeds, it should be noted that: ● privatization cannot serve to close the budget holes. ● there will be a threat to the country's economic security in case of situation worsening in the Eastern part of Ukraine: under circumstances of necessity to reorient the production it will be more difficult to conclude agreements with investors. ● individual interests of investors may contradict the national one: there is a risk that investors will dictate their conditions and will make the key sectors of the Ukrainian economy dependent. ● Ukrainian state-owned enterprises can be bought by those who aim at buying the assets cheaply (in the absence of large investors) or at eliminating the competitors. Privatization 2018 may simply turn into a simulation that will cover the pre-election activatisation of the redistribution process of the spheres of influence or the “giving the gifts” process. ● the issue of Naftogaz monopoly and the issue of the partial privatization of organization will not be resolved. Naftogaz will remain fully state-owned and its functions will not be divided between individual independent companies in accordance with the European requirements regarding the system of distribution of functions in the energy market. ● significant responsibility will delegated to the Antimonopoly Committee of Ukraine. "Wholesale" privatization of enterprises of the same sphere can lead to the creation of monopolies in the market, which is highly undesirable, especially in the chemical industry and other key sectors of the Ukrainian economy. ● the problem of Ukrainian enterprises is not in the type of ownership, but in poor management and excessive monopolization of the market. Any company can be managed well or badly regardless of its ownership type. On the other hand, the foreign investors could contribute to: ● redistribution of the market, increased competition, even greater demonopolization, weakening of the "dictatorship" of individual companies. ● receiving currency income and, as a result, strengthening the exchange rate of the Ukrainian hryvnia. ● increase in the number of relatively stable companies: stability will be due to foreign capital, which is not tied to hryvnia and to the economic situation in Ukraine. Thus, investments in privatized enterprises can provide significant support to the country's economic growth. However, this can only be done under condition of a sound public policy, which will be aimed at protecting the national interests, and not only the individual interests of investors. Otherwise, privatization will bring nothing useful to Ukraine - no money to the budget, no investments in production, no skillful management for enterprises, no implementation of recommendations of international donors and organizations.
Reliability and Indicators of the Ukrainian Banking System: Growth Driver or Burden?
The banking system is a source of economic growth in the developed countries, but in Ukraine not-efficient and badly managed banks became a burden for Ukrainian taxpayers – or even a tool for stealing the funds. The recent news on increasing number of non-performing loans and related NBU reports have been a new serious alert that urgent actions to fix the situation are on the agenda again. Current actions of Ukrainian authorities have not been effective so far, therefore new efficient strategy of how to develop the banking sector is urgently needed. According to the quarterly "Survey on lending conditions", that was conducted by the National Bank of Ukraine on the results of the 1st quarter of 2018, the increase of banks' activity in approving the applications for loans to enterprises and for consumer loans was noted. At the same time, 76% of banks expect an increase in the loan portfolio of businesses throughout the year, and 69% of banks forecast an increase in loans to individuals. However, it should be noted that the volume of non-performing loans in Ukrainian banks remains unchanged and sometimes it even shows a tendency to increase, despite the NBU's requirements to solve the problem. Accordingly, even after the "purification" of the banking system in 2014-2016, the risk of non-repayment of loans has not decreased in any way. Moreover, 31 out of 82 functioning banks violate the norms set by the National Bank of Ukraine (data on compliance of banks with the economic norms of the NBU) that only complicates the situation and may lead to further actualization of the problem of non-performing loans, together with a growing distrust in banks. At the same time, instead of effectively addressing the issue, the government continues to writing off the non-performing bank loans. In particular, only "PrivatBank" in 2017 wrote off ₴ 5.863 billion of unpaid loans issued prior to the nationalization of the bank that became known from its financial statements. What do we have today? Traditionally, the leaders in terms of the amount of non-performing loans are Ukrainian state banks. Moreover, the ratio of "non-working" to "working" loans is also an issue. It turns out that while the standard is not more than 30%, in Ukraine, every second loan is not returned - in average, this ratio is equal to 56%. The total volume of such "assets" reaches ₴ 630 billion. At the same time, according to the deputy chairman of the National Bank of Ukraine Kateryna Rozhkova, almost 70% of "bad" debts are concentrated by 20% of borrowers. Banks, in turn, cover non-performing loans with an increase of interest rate on issued loans, which reduces their attractiveness and shallows the prospects for economic growth of the country. Name of the bank Banking group (by origin of banks' capital) The percentage of non-performing loans Non-performing loans, thousand UAH 1 PJSC "BTA Bank" Bank of foreign bank groups 98,63% 753983 2 PJSC "VTB BANK" Bank of foreign bank groups (Russia) 94,60% 20108232 3 JSC "BM BANK" Bank of foreign bank groups (Russia) 94,36% 2095905 4 PJSC "JSCB Trust-Capital" The bank with private capital 88,90% 125562 5 PJSC "PRIVATBANK" Bank with a state share 86,69% 235555104 6 PJSC "UKRSOTSBANK" Bank of foreign bank groups 84,54% 36516685 7 PJSC "BANK FAMILNIY" The bank with private capital 80,89% 55850 8 PJSC "Prominvestbank" Bank of foreign bank groups (Russia) 76,65% 35445306 9 "CLEARING HOUSE" The bank with private capital 72,76% 803570 10 PJSC "CREDIT EUROPE BANK" Bank of foreign bank groups 68,50% 611500 11 JSC "Ukreximbank" Bank with a state share 64,92% 83072616 12 JSC "OSCHADBANK" Bank with a state share 64,38% 80235272 13 PJSC "BANK CREDIT DNIPRO" The bank with private capital 62,46% 4091593 14 PJSC "VS Bank" The bank with private capital (Russia) 58,40% 1179665 15 PJSC "SBERBANK" Bank of foreign bank groups (Russia) 56,65% 32835471 16 JSC "City Bank" The bank with private capital 54,53% 746337 17 PJSC "UNEKS BANK" Kyiv The bank with private capital 53,65% 276818 18 Polycombank The bank with private capital 47,80% 169758 19 PJSC "UNIVERSAL BANK" The bank with private capital 47,25% 2257838 20 PJSC "BANK FORWARD" Bank of foreign bank groups 46,70% 813759 Source: calculations according to the NBU data The NBU's actions to keep inflation under control is important in this situation. As a result of NBU actions the discount rate has recently reached 17% and, according to the latest decision, remained unchanged, while affecting the interest rate on the issued loans. In turn, high interest rates frighten the business. Taking that into account, banks are lending money to questionable projects, which allegedly guarantee higher returns. Nevertheless, there is a hope that the increase of inflation processes will be stopped, resulting in the decrease of the discount rate over the next three years and, accordingly, in the decrease of interest rates on issued loans. Data Forecast 2014 2015 2016 2017 2018 2019 2020 Interest rate for loans in national currency, at the end of the year, % per annum 16,6 20,4 15,2 17,5 17,0 15,0 14,0 Source: "Economic Analysis and Current Trends: Forecast for 2018-2020", ICPS, 2018 The problem of unprofitability of some banks also remains important. According to the results of the 1st quarter of 2018, the banking system of Ukraine in general reached the profitable level (₴ 8.672 billion), however 14 out of 82 working banks still remained unprofitable. Profitable banks, top 3 Loss-making banks, top 3 Profit, UAH billions Loss, billions UAH "PrivatBank" 3,654 "Prominvestbank" 0,294 "Raiffeisen Bank Aval" 1,381 "Ukrsotsbank" 0,290 "OTP Bank" 0,612 "Credit Dnipro" 0,117 Source: according to the NBU data In this regard, further competition for the profit and market share will push the banks to risk activities and will worsen their loan portfolio. In addition, there is a share of consumer lending in the portfolio of many banks. Under conditions of insufficient growth of the Ukrainian economy and high level of inflation, the prospects of returning such loans are worsening. On the other hand, such loans are the easiest way for the banks to earn money and therefore, in the absence of the required demand from the business side, the share of consumer loans is steadily increasing, although it is not yet significant. In general, according to the monitoring conducted by the International Center for Policy Studies together with the Independent Association of Ukrainian Banks, the most widespread and accessible Ukrainian banks are not ranked first in the financial health rating. This fact only emphasizes the systematic problems of Ukrainian banks. Top 10 banks for compliance with standards Top 10 banks for the ability to generate profits Top 10 banks for the overall indicator of financial health 1 Ukr. Bank for Reconstr. and Development 1 PJSC "Idea Bank" 1 PJSC "Idea Bank" 2 PJSC "ALPARI BANK" 2 PJSC "A-BANK" 2 PJSC "A-BANK" 3 PJSC "AP BANK" 3 PJSC "SITIBANK" 3 PJSC "SITIBANK" 4 PJSC "CREDIT EUROPE BANK" 4 PJSC "MIB" 4 PJSC "CREDIT AGRICOLE BANK" 5 PJSC "SEB CORPORATE BANK" 5 PJSC "ALFA-BANK" 5 PJSC "ALFA-BANK" 6 PJSC "BANK 3/4" 6 JSC "TASKOMBANK" 6 JSC "TASKOMBANK" 7 PJSC CB "Center" 7 PJSC "CREDIT AGRICOLE BANK" 7 JSC "Raiffeisen Bank Aval" 8 PJSC "BANK" PORTAL" 8 JSC "OTP BANK" 8 PJSC "BANK AVANGARD" 9 PJSC "BANK FAMILNIY" 9 JSC "Raiffeisen Bank Aval" 9 JSC "UkrSibbank" 10 JSC "ALTBANK" 10 PJSC "KREDOBANK" 10 PJSC "BANK ALLIANCE" Source: "The Rating of Financial Health of Ukrainian Banks", ICPS and NABU, 2018 What to do? It is clear that problem loans are the consequence of the careless and sometimes "purposeful" policy of the banks. The recent creation of a "Credit register" (where the debtors that owe the bank more than ₴ 372 300 will be listed) will simplify the client verification process for the bank. However, it will not solve the problem with the existing non-performing loans. The issue can not be also solved by the adopted law (in the first reading) "On Amendments to Certain Legislative Acts of Ukraine Regarding Restoration of Lending", since this document is more focused on simplifying the process of collecting the debts, rather than overcoming the root causes of the appearance of the "problem" loans. Therefore, as long as the banking market is not sufficiently transparent and open, the NBU's monitoring systems will be bypassed by financially unhealthy banks, that conduct risky operations, and businesses, that create "fake" companies or deliberately declare themselves bankrupt. Moreover, the share of such "bankrupts", according to the message of the chairman of the Committee on financial policy Mykhailo Dovbenko, has reached 80% of the total number of legal entities-borrowers. Accordingly, today, mainly the problem loans are the funds that companies have fraudulently taken out abroad through the banking system or consider not necessary to return. Taking into account the above-mentioned aspects and the insufficient financial health of the key Ukrainian banks, it is necessary: - to conduct in-depth monitoring and audit of not only the allocated funds, but also the borrowed funds; - to adopt the experience of sustainable foreign banks in risk management and loan portfolio management; - to invest in training of staff for proper assessing the solvency of bank clients; - to implement the corporate social responsibility practices; - to increase the market share of foreign banks in order to ensure the healthy competition; - to avoid the emergence of informational "fakes" that are created due to the "war" between debtors and creditors; - to implement legislative improvements that will improve the business climate in Ukraine; - to support the NBU's independence from political decisions and fraudulent actions of the market participants. Unless the banks will qualitatively invest in government securities instead of the business projects, while not being the "blood system" of the real sector of economy, and unless the banks will be used for money laundering and withdrawal, while undermining the confidence, the population will have nothing else but to keep its money in a "glass jar", thus deepening the "financial starvation" of the banking system and its burden of non-performing loans, as a result, slowing down the economic development of Ukraine. And the only way, in the absence of qualitative Ukrainian management, will be selling the banks with a portfolio of bad loans, while on the one hand, attracting investments, and on the other hand, losing the remedies to somehow positively affect the banking market and its development strategy in the long run.
Energy interests and economic security of Ukraine
The decision of Germany and other EU countries to permit the construction of the “North Stream-2” gas pipeline again raised the issue of the future of Ukraine's gas transportation system and energy security of the country as a whole. Despite certain tactical achievements (reducing the volume of Russian gas consumption, the acceptable for “Naftogaz” decision of the Stockholm arbitration, etc.), the question of a strategy for achieving the energy security in general remains one of the most important challenges for Ukraine's national interests. At the same time, the government announced plans for achieving energy independence of Ukraine in 2020 and its sustainable development in 2035, however the way towards remains blurred. In addition, the implementation of Russian alternative gas pipeline projects may leave Ukraine at the edge of such an important element of economic activity as gas transit, leading to significant financial and political losses. Main figures and trends In 2017, “Gazprom” increased its exports of gas to Europe by 8.1%, reaching 193.6 billion cubic meters. In total, EU consumption in 2017 is estimated at 560.5 billion cubic meters of gas. Thus, “Gazprom's” market share in Europe has reached 34.7%. At the same time, Germany remained its largest market, while having imported 53.4 billion cubic meters of gas. Ukraine's GTS in 2017 provided 44% of Russian gas supplies to the EU. The transit of gas through Ukraine last year amounted up to 93 billion cubic meters. Compared to the volumes of 2016, transit has increased by 13.7%. This allowed Ukraine to earn nearly $ 3 billion due to the transit of Russian gas. Given that the country's GDP in 2017 was equal to $ 110 billion, this amount has made up to 2.7% of its volume. At the same time, in mid-January 2018, “Gazprom” received permission from Turkey for the construction of the second line of the "Turkish Stream" gas pipeline. Later, on March 26, Germany allowed to construct the “Nord Stream-2” in the Baltic Sea. The Russian gas monopolist has also made concessions to change the gas prices for the markets of Central and Eastern Europe. Such actions can have a positive impact on the European Commission's decision to address “Gazprom's” antitrust legislation in the European markets, which is expected in late April. These facts indicate that, despite complicated political relations, the EU Member States' own interests in the sphere of economic cooperation and, especially, energy, remain crucial. The construction of new gas pipelines, alternative to the Ukrainian GTS, can marginalize Ukraine's role in the issue of gas transit, transforming such a strategic national resource as a gas transportation system into a scrap in the future. In order to avoid the implementation of such a scenario, fast and effective actions are needed to preserve the role and place of the Ukrainian gas pipeline in the transit of gas from Russia to European countries. Consequences of Russian gas streams “North Stream-2” and “Turkish Stream” projects envisage the launch of a gas pipeline with a total throughput of about 85 billion cubic meters of gas per year. Given the recent data on transit through the Ukrainian GTS, the launch of the above-mentioned streams can take away nearly 90% of Ukrainian transit or nearly $ 2.7 billion in revenue per year. Main gas pipelines from the Russian Federation to Europe TITLE OF THE GAS TRANSPORT SYSTEM STATUS CAPACITY “Ukrainian GTS” Functioning 288 billion cubic meters per year 142,5 billion cubic meters per year (near EU border) “Yamal – Europe” Functioning 32,9 billion cubic meters per year “Nord Stream” Functioning 55 billion cubic meters per year “North Stream 2” Project The launch is planned in 2019-2020 55 billion cubic meters per year “Turkish Stream” Project The launch is planned in 2019-2020 31,5 billion cubic meters per year “South Stream” Project Frozen 63 billion cubic meters per year Source: Information from public sources Approximately the same figures are announced by “Naftogaz”, which estimates the financial losses at $ 3-3.5 billion dollars from the launch of alternative gas pipelines by Russia and from the complete stop of the Ukrainian GTS. In addition, the term of the current contract with “Gazprom” on the gas transit expires in 2019. According to the head of the Russian company, Alexei Miller, “Gazprom” can provide transit through Ukraine in the amount of 10-15 billion cubic meters per year, which is up to 10% of its capacity and less than 20% of the current volume of transit. For that, according to the head of the Russian monopolist, Ukraine must justify the "economic feasibility" of a new transit contract. In turn, the Ukrainian side announced that its main goal would be to preserve the transit of Russian gas through Ukraine after the expiration of the contract with “Gazprom”. However, it has not informed yet in what volumes and how it is planned to be reached. Nevertheless, the Cabinet of Ministers of Ukraine has already said that it is looking for a company to manage the Ukrainian gas transportation system. It also presented the idea that Ukraine would be able to further operate the gas transportation system by importing or transiting gas from Romania, however it is unlikely that the Romanian transit would be able to replace the vacuum created due to the redirection of the current transit flows. Additional aspects of energy relations In addition to the gloomy prospects in relations with the Russian Federation on gas transit and while taking into the account the blockade of the Donbas, Ukraine has to solve the issue of own energy supply and the reduction of its import dependence. This is confirmed by the fact that in 2017 Ukraine significantly increased the volume of imports of natural gas, coal and petroleum products. Moreover, Slovakia, Belarus and Russia were the main energy resource supply countries in 2016-2017. Main energy resources: import, export, transit Import, 2017 Change in imports to the previous year Export, 2017 Change in exports to the previous year Transit, 2017 Change in transit to the previous year Natural gas 14,6 billion cubic meters +49% - - 93 billion cubic meters +13,7% Coal 19,777 million tons + 26,4% $105,5 million +200% - - Petroleum products 9,7 million tons +11% 0,8 million tons +100% 16,4 million tons +1% Nuclear fuel $533,4 million -2,9% - - - - Electricity 0,05 billion kW per year -38% 5,2 billion kW per year +37% 1,4 billion kW per year +218% Source: According to the data of Energy Customs and State Fiscal Service On the other hand, the development of the renewable energy sector is positive for Ukraine. In particular, according to the State Department of Energy Efficiency, its total launched capacity reached 121 MW in 2016 and 257 MW in 2017. At the same time, only during the 1st quarter of 2018 Ukraine launched nearly 159.4 MW of renewable energy. In general, since 2015 more than 550 million euro has been invested in "green energy" and the total capacity of renewable energy entities is now equal to 1.5 GW. At the same time, in the near future, renewable energy will not replace the traditional energy sources, and only the implementation of real market conditions in the energy sector while promoting investments, increasing own gas production and strengthening the energy-saving technologies, will allow the country to approach the minimum acceptable standards of energy security. The ways of balancing the energy interests The nearest tasks for the Ukrainian government in the energy sector include: liberalization and opening the energy markets; preservation of the transit infrastructure of the state, restoration of confidence of external partners and financial organizations in the reliability of Ukraine as a transit country; well-balanced tariff policy for the transit of energy resources and domestic energy consumption; the fulfillment of requirements of the Third Energy Package, namely the separation of the “Naftogaz” activities for the transportation and distribution of natural gas; "Energy Euro-integration", synchronization of the energy systems with the European market (ENTSO-E, ENTSOG); diversification of sources of the energy resources; decreasing the energy consumption for own production, increasing the energy efficiency of the country; growth of Ukrainian energy resources production; stimulating the alternative renewable energy. In the near future, Ukraine has to settle the issues of “Gazprom's” supply of 2 billion 427 million cubic meters of gas to the occupied Donbass area and the $ 1.3 billion invoice. In addition, the decision result of the Court of appeals in the County of Svea (Sweden) on the dispute between “Naftogaz” and “Gazprom” about $ 2.5 billion of fines due to the Stockholm arbitration is being expected. The solution of the above-mentioned issues will eliminate the possible risks of Ukraine's energy and economic security. Otherwise, Ukraine risks losing a significant share of transit, which will result in the further increase in tariffs for the population and in the disruptions in functioning of its GTS. However, even under these circumstances, there is a hope that the growing demand in the European market and the interests of “Gazprom” to constantly increase its market presence there (as evidenced by data - its market share reached only 26% in 2012) may partly save Ukraine from the total loss of the GTS. Thus, the chess game on the energy interests of all interested parties has not finished yet. The fact that “Gazprom” will not be able to completely stop the transit of gas through the Ukrainian territory plays in favor of Ukraine. This is supported by the growing demand for gas in Europe, by the load of gas pipelines branches, by the relative loyalty of neighbors and by the favorable infrastructure of the Ukrainian GTS. However, it is not possible to win due to only these factors. Therefore, in order to ensure the transit of gas after 2019 in the amount not less than 40 billion cubic meters per year (minimum economically profitable volume) and to attract investments in modernizing the Ukrainian GTS, the government should not continue the only rhetoric of confrontation and should not feed the illusion of independence, but it should take the concrete steps, negotiate with all parties and propose alternatives to achieve long-term goals rather than short-term benefits. Otherwise, the levers of influence can finally disappear and economic security together with the energy interests will be once again solved at the expense of the Ukrainian population.
Macroeconomic forecast "Economic analysis and current trends"
The International Centrе for Policy Studies has prepared the next issue of the brochure "Economic Analysis and Current Trends" for January 2018. It contains a detailed analysis of indicators of the manufacturing sector, prices, financial market and forecast for 2018-2020 years. Data analysis on key areas for 2017 indicates that: The following indicators have decreased: - production in industry by 0.1% y/y, in particular through trade blockade. - production in agriculture by 2.7% y/y, due to a lower yield of main crops. - the purchasing power of the population due to the high level of consumer inflation, which was 13.7%, and the inflation rate of industrial producers, which was 16.5%. - interest rates on loans and deposits, in particular due to the large offer of such deposits and, at the same time, limited lending to business and population. The following indicators have increased: - turnover of wholesale and retail trade by 2.8% and 8.8% respectively. - cargo turnover and passenger turnover by 5.8% and 7.4%. - the volume of construction products by 20.9%. - the volume of deposits left by 13%; - the amount of loans left by 1.9%. According to the forecast, in 2018 there will be an increase in domestic consumption and investments, and exports of goods and services. Increasing the minimum wage and raising pensions will help increase consumption, although they will contribute to inflation in 2018. It is also noted that in 2018 there are two main risks that, if implemented, will significantly change the economic situation: - firstly, there is a probability of non-fulfillment of the requirements of the IMF, as a result of the government will not receive money from the IMF and other international organizations and large payments on external debt will lead to a significant reduction of foreign exchange reserves and a sharp devaluation of the hryvnia. - secondly, in 2018, world prices of resources may decrease significantly after their rapid growth in 2017, which will result in lower revenues from exports of goods and an increase in the current account deficit, which will increase the pressure on reserves and hryvnia.