Offshore capital returns to Ukraine’ s banks
Ukrainians have been showing unprecedented levels of trust in the country’s banking system. Neither the parliamentary elections, nor political scandals, nor Ukrayina Bank bankruptcy last year discouraged the citizenry from depositing money in bank accounts. Over the past year, the value of deposits grew 2.5 times and totaled UAH 19 billion, some nine percent of official GDP, an outstanding success compared to the 2001 estimate, 5.5 percent.
In the meantime, the rapid growth of borrowing in Ukrainian banks shows no signs of abating. According to 2002 estimates, capital assets increased by over one-third. To date, banks have invested a total of UAH 64 billion. Interestingly, our economy swallowed up this fat piece as a starved beggar, and, as a result, GDP went up a mere 4.1 percent. Put simply, were the interest rates lower, Ukrainian businesses would have readily taken even more loans. Paradoxically, against such a sharp increase in the volume of banking investments the share of bad loans in the banks’ credit portfolio decreased from 5.8% to 4.5%. Bankers attribute this trend to a more meticulous selection of borrowers. However, it is obvious that this can hardly be the only reason behind such a mysterious trend.
The fact that borrowing rates exceeded the GDP growth rate almost tenfold came as a surprise to economists. Moreover, economic theory views such a situation as extremely dangerous. Ultimately, the economy may simply fail to use and repay all loans. But the reality is quite the contrary, which is evidenced by the above said higher quality of loans. Oleksandr Suhoniako, chairman of the Association of Ukrainian Banks, explains this paradox, stating that “The Ukrainian economy works above any theories.” He believes that the economy, which is half unofficial, skews the statistics to such an extent that determining certain trends is highly problematic.
Unbridled growth rates are also evidenced by the index of banks’ capital gains. Last year alone this index was up by over one-fourth, over UAH 10 billion. Sizable capital controlled by owners of Ukrainian banks has accumulated at offshore accounts. According to some estimates, these funds far exceed those declared in Ukraine. Notably, the Ukrainian banking system is next to last in Europe according to the volume of officially declared capital. To a great extent these statistics explain the nature of the banking sector boom.
The average interest rate on loans in hryvnias in commercial banks dropped from 27.4 to 19.5 percent in 2002. Throughout the year, the government had pressed bankers to tie the loan interest rates to the inflation rate, or rather deflation rate, since prices fell by 0.6 percent, and the exchange rate dynamics at the foreign exchange market (0.6 percent). Bankers attribute the relatively high interest rate on loans to political volatility as well as the high price of resources received from the population. Stanislav Arzhevityn, board chairman of the Agio Bank, believes that only the National Bank of Ukraine is capable of taking effective measures aimed at reducing the interest rate on loans charged by commercial banks.
In the meantime, the NBU channels money into the economy mostly by intervening in the foreign exchange market. As a result of such interventions, the money supply increased by more than forty percent last year. Despite such considerable emissions, the economy is showing signs of stagnation which are manifested in the zero inflation rate in producers’ prices. In all probability, the reason behind this mysterious phenomenon lies in the gross distortions characteristic of the correlation between the size of the official and shadow offshore economy, as well as the considerable amount of assets in foreign currencies beyond the control of the government.
The banking system still believes it necessary to minimize tax amounts. The aggregate index of after-tax profit of 134 banks, members of the Association of Ukrainian Banks, totaled UAH 620 million. This means that the declared profitability of assets of commercial banks is around one percent per year. In reality, this index is much higher.
Traditionally, banks are the harbingers of economic trends. The upturn in the banking sector is due to the partial emergence of what might be called “shadow capital” which increases money supply as well as the initial redistribution of property. Simultaneously, the country’s financial system remains crime-ridden to a great extent. Capital holders’ unwillingness to keep money in Ukraine explains these sensational distortions of development of banks. The stability of prices and the rate of exchange between the hryvnia and other currencies are evidence of market self-regulating mechanisms at work. But the real indices of the current financial balance are anyone’s guess, since the results of activity of banks, just like any other entity in Ukraine, are never made public.
