Grzegorz Jeż, Obserwator Finansowy: After the first war in Ukraine, please, tell me how it happened that the Ukrainian banking system was preserved and at the same time how it was affected during the first year of the war.
Sergiy Nikolaychuk: First of all, thank you very much for inviting me and providing this possibility to talk about our issues, about our resilience, and about our courage during this war. Definitely, the resilience of the Ukrainian banking system surprised a lot of people, but I would say that it did not come by itself. We assess it as the outcome of the reforms which we as the central bank with other regulators implemented during the last few years after the crisis of 2014-2015. Also, we put a lot of effort in developing and realising business continuity plans together with banks and that was another part of the story. And the third factor, as I would call it, is our prompt actions, our change in the regulations by the central bank and also other financial regulators, and of course the ability of the commercial banks to adjust to this new environment.
So, what do you think may happen to the system if the war prolongs? Do you think that there are any big threats to the banking system and to the whole economy of Ukraine?
Definitely. The banks face challenging times, so definitely the war is taking a heavy toll on the economy and on the banking system, but so far we still think that our banking system is in a very good condition despite the war. So definitely we expect a very sizeable negative effect from the war on the quality of assets, the quality of the loan portfolio. Actually, in our December financial stability report we assessed that around 30 per cent of the loan portfolio existing before the full-scale war will be problematic, but at the same time our assessment is that the major part of the largest banks will be able to recover their capital even without additional injections of capital from the owners, just based on their profitability, operational profitability, which is still in place.
Last year one of the NBU’s analyses indicated that there is a risk that the Ukrainian economy will shrink by 33 per cent. From a regular perspective, it’s very hard to imagine and the question is: how are you able to survive and what is the impact of the war on the Ukrainian economy? Of course I know it is devastating, but can it be measured or can it be estimated at all?
Actually, you provided one of the measures, that is the drop in GDP, and it’s true that through the last year we assessed it to be around 35 or 33 per cent. In the end, our January inflation report envisaged that for the last year we had a decline in GDP of 30 per cent, so it seems that this outcome is the result of the high adaptability of the Ukrainian businesses, Ukrainian authorities, and Ukrainian people to these new conditions. But of course the outcomes would have been even better, but unfortunately in the fourth quarter Ukraine faced continuous terrorist attacks from Russia on our energy infrastructure and that also put an additional drag on our economy. Taking this into account, we may also refer to the direct losses in our physical assets and infrastructure, which are currently assessed to be around USD 140bn, and that’s about 2/3 of our pre-war GDP, so it’s a huge amount. We may also mention 8 million people who have left the country since the beginning of the war, which is more than 20 per cent of our population before the full-scale war. These are dramatic numbers, but the economy is still alive. We see some adjustments of the economy to the new conditions and actually for this year we expect that we will even have some small but slow growth of 0.3 per cent of GDP.
I know that it may be tricky to think about it right now, but during such a devastating crisis I guess that maybe you think of what may happen after the war has ended and what economic models Ukraine should adopt to develop and improve and to restore the economy after the war?
I would say that the Ukrainian authorities have already started to think about that, to develop plans and to develop the institutions and structures, how to organize the reconstruction of the country. Probably the benefit we have in this devastating environment is that we have a very clear anchor – that is the prospect of membership of the EU. And the economy which you asked I would like to see is definitely the model of the economy integrated in the European economy and definitely a lot has to be done for that, both in the institutional area, in aligning our regulations completely to EU acquis, but we also need to do a lot in terms of logistics, in terms of the transport connection to the EU hubs, including those located in Poland.
My last question concerns a technical issue, I would say. Last May, the NBU resumed regular decision-making and interest rates have been raised. And sometimes I wonder whether during the war it matters at all?
SN: It definitely matters. Actually, we adjusted our monetary policy set-up on the first day of the war. We used to rely on the inflation targeting framework before the full-scale war, but we understood very clearly that this set-up is not suitable for the war conditions. So that’s why we pegged the exchange rate to the US dollar on the first day of the war and relied on our fixed interventions and tough capital controls in order to maintain the stability of the exchange rate. And also during our monetary policy committee meetings in March and April we postponed our decisions on the key policy rate, keeping it at 10 per cent, but then, when we observed that the economy had started to adjust to these new conditions, we started to return some parts of the normality in our business, and one part of such normality was the start of using the interest rate policy as an additional instrument, an additional part of our toolkit in order to preserve the stability of the exchange rate. And that’s why at the beginning of June, we raised our interest rate from 10 to 25 per cent, trying to improve the attractiveness of our assets in the local currency.
And this rate still applies today, right?
But do you plan any changes?
SN: Definitely, we have also renewed the publication of the future interest rate path in our inflation report and actually our January inflation report envisaged that we will keep the interest rate at this level until the second quarter of 2024, when we are able to start the easing cycle.
The interview was held on the 19th of February 2023