Ukraine seeks to avoid negative economic impact of PrivatBank takeover

Ukraine seeks to avoid negative economic impact of PrivatBank takeover
NBU Governor Valeria Gontareva speaks at the Verkhovna Rada of Ukraine
By Sergei Kuznetsov in Kyiv December 23, 2016

Both the Ukrainian authorities and independent experts believe that any negative impacts from the nationalisation of PrivatBank for Ukraine’s battered economy will be limited. In fact, the takeover of Ukraine’s biggest lender, alongside the adoption of the state budget for 2017, might actually improve the country’s chances of securing the next tranche of bailout cash from the International Monetary Fund (IMF).

“If there is no significant outflow of deposits [from PrivatBank after its nationalisation], it should not exert additional pressure on the hryvnia exchange rate and inflation,” believes Olena Bilan, chief economist at Kyiv-based brokerage Dragon Capital.

The Ukrainian authorities intend to issue up to UAH116.8 ($4.4bn) in domestic government bonds, with a maturity period of up to 15 years and a maximum income interest rate of 10.5%, to pay for an additional issue of shares in PrivatBank, which was nationalised on December 18. The transfer of the bonds to the bank’s capital will occur in a series of stages with the first instalment totalling UAH43bn.

“The bank can monetise [the bonds] in the National Bank of Ukraine, ie. obtain the hryvnia, only if there is a sharp outflow of deposits and the bank will need additional liquidity,” Bilan says. “In other words, the nationalisation of the bank does not mean automatic infusion of hryvnia into the economy. That is why it should not put any additional pressure on the exchange rate and inflation unless there is no significant outflow of deposits.”

On December 22, 100% of PrivatBank’s shares were transferred to Ukraine’s Ministry of Finance. According to government agencies responsible for nationalisation procedures, all the required procedures have been settled: specifically, its reserves for active transactions have been formed, amendments to the bank’s regulations made, the transition balance formed and all the procedures for the reshuffle of its owners finished.

The Ukrainian government was forced to announce the nationalisation of PrivatBank, owned by oligarchs Ihor Kolomoisky and Hennady Boholyubov, after its former owners failed to recapitalise the lender and the regulator found a UAH148bn ($5.6bn) hole in the bank’s balance sheet as of early December. The National Bank of Ukraine (NBU) found a massive 97% of the bank’s loans had been made to shell companies and related-party companies, many of them offshore, that are believed to be owned or controlled by the bank’s oligarch owners, as bne IntelliNews described in a cover feature in November. 

Meanwhile, the NBU said that the government’s decision to take over PrivatBank will not have a significant effect on the Ukrainian forex market and macroeconomic indicators. According to the regulator’s statement e-mailed to bne IntelliNews, the regulator said it is controlling the potential consequences of monetisation of domestic sovereign bonds issued by the Ministry of Finance for PrivatBank.

Money supply growth through the bonds channel will be considerably stretched over time, the NBU underlined. “Amount of monetisation of domestic sovereign bonds will be substantially less than the amount of the bank’s capitalisation as the needs of PrivatBank in additional liquidity will not be significant, according to the NBU,” the regulator explained. 

“The bank has quickly returned to normal functioning. Expectations of the public and market participants show signs of stabilisation. Due to that, cash outflows from the bank are declining,” the statement read.

“Important step”

The crisis at PrivatBank threatened Ukraine’s entire banking system, President Petro Poroshenko said in a statement hours after the government moved to take over the battered lender. “Over the past six months, serious concern over this issue has been raised by our key financial partners – the IMF, World Bank, EBRD,” he explained.

Meanwhile, Ukraine’s state debt will increase by about 5.0% of GDP (to about 85% of GDP) as a result of the issuance of government domestic bonds, according to estimates by Kyiv-based experts.

“The increased leverage won’t harm Ukraine’s cooperation with the IMF since it foresaw the nationalisation scenario, with an up to UAH150bn contribution from the state into the bank’s equity. Instead, we expect the nationalisation will even accelerate the release of the next IMF tranche to Ukraine,” Alexander Paraschiy at the Concorde Capital brokerage believes.

Christine Lagarde, managing director of the IMF, said in a statement on December 19 that it is now important that the process of nationalisation be followed by “firm efforts to maximise the repayment of related-party loans, and the appointment of an independent management team to restore the bank’s viability, minimising the cost to the state and taxpayers in line with existing legislation and international best practice”.

Lagarde described Kyiv’s decision to take over PrivatBank as “an important step” in efforts to safeguard financial stability and to “ensure the smooth operations of the bank given its systemic role in Ukraine’s financial system, and in view of insufficient efforts to strengthen its capital adequacy in recent months”.

“The nationalisation brings Ukraine closer to the next tranche of the IMF, which will have a positive effect for the economy,” Dragon’s Bilan believes.