Sunday, May 29, 2016

Week’s balance: Cabinet action plan, forex easing, and withdrawal of banks

Olha Hordienko (UNIAN)

The Ukrainian Cabinet approved a priority action plan and launched a customs reform, the National Bank sent a good signal by decreasing the key interest rate and easing the foreign exchange market, and the banking market saw new bankruptcies – these are the main economic news of the last week of May.

The key event of the last week in the economy was the approval by the Cabinet of Ministers of its priority  action plan for 2016. The decision was taken at an extraordinary government meeting on Friday.

"Our task now is to proceed with the implementation of the plan as soon as possible," said Prime Minister Volodymyr Groysman and promised his fellow citizens to report as early as July, urging ministers to get ready for this.
The plan, which is more than 200 pages thick, published at the beginning of the week, includes the areas of operation of all ministries and central authorities. The Government has determined the main macroeconomic objectives the reduction of the budget deficit to 3% in 2017 from today’s 3.7%, and the growth of industrial production by 4% in the medium term against the current level of 1-2%.
According to Deputy Prime Minister Stepan Kubiv, the plan provides for a tax reform that simplifies the administration of value added tax, the single social contribution and a personal income tax, but also contains measures to simplify custom procedures for agricultural exports, liberalization of currency regulation and copyright protection. In addition, Groysman’s Cabinet aims to carry out privatization of the Odesa Portside Chemical Plant and Centrenergo power generating company.
At the meeting with the businesses, head of government has promised to introduce after the tax reform a moratorium on changes to the Tax Code for a period of three to five years, continue the practice of public competitive selection of the heads of state-owned enterprises and privatization of these SOEs, make publicity a prerequisite for conclusion of public contracts, as well as ensure the preservation of agricultural land turnover maintaining the existing system of property rights.
In addition, according to Groysman, the Cabinet will make every effort to reform the labor market and increase wages and contribute as much as possible to attracting foreign investment.
"We can protect the investment, people will invest and create jobs. Attraction of investments is one of the main priorities... Create jobs for Ukrainians, and we, the government, we will work for you," the prime minister said.
Customs reform

Some provisions of the plan of revival of the national economy the government has already started to implement. In particular, last week, Cabinet approved a number of documents required to start the long-awaited customs reform, without which Ukraine is likely to fail to see any new investors.
In particular, the Cabinet of Ministers adopted a decision to implement a "single window" custom simplifies custom clearance procedure on the basis of a unified electronic database of regulatory authorities.
As the Minister of Finance Alexander Danylyuk said, the system combines all types of control, including customs, sanitary-epidemiological, veterinary, sanitary, phytosanitary, environmental and radiological, due to a unified database. And now, instead of the seals and stamps of state authorities on paper documents, control marks will be put into this common database. In addition, the supervisory authority will have to make a decision within four hours, otherwise the system will do it for them automatically.
In addition to introducing the "single window," the government plans to oblige custom authorities to record on video or photograph the goods and vehicles checked, to eliminate corruption and smuggling. Groysman assured that the State Fiscal Service has all the necessary technical means for the implementation of this initiative, which may be introduced as early as August 1.
Also, the Cabinet passed a resolution limiting the grounds for the inspection of goods at the customs, which allows minimizing the damage caused by so-called "tax squirrels" – corrupt officials who exercise pressure on the exporters of nuts and other agricultural products. The Prime Minister vowed to fight the “nut mafia” and control the law enforcers and the implementation of the government resolution.
In addition, the Cabinet approved the draft law developed by the Ministry of Finance on the introduction of an authorized economic operator, which will simplify custom procedures for large companies long engaged in export and import of the standard basket of goods.
Groysman also threatened the smugglers with the imminent creation of the so-called "Black Hundreds," or interdepartmental mobile teams consisting of customs officers, border guards, police and tax officials. This decision can be taken at the next government meeting. Head of the SFS Roman Nasirov promised that these groups can start their operations within a month.
Optimistic National Bank

Last week, the National Bank brought some good news, having decided from May 27 to reduce the key interest rate by 1 percentage point, to 18%. As the NBU explained, rate reduction for the second consecutive month was possible due to a steady decline in inflation. The interest rate reduction was followed by a decreased rate on deposit certificates and NBU refinancing rate, which will push the banks’ interest rates on deposits and loans.
Regulator's decision was expected for the market. "I believe that there are all the necessary conditions for the rate reduction, and the NBU needs to lower the rate," member of the Ukrainian Society of Financial Analysts Vitaly Shapran predicted on the eve of the NBU’s decision. Although the rate cut is mathematically symbolic - only 1 percentage point - this NBU decision has an impact on market expectations, confirming the lack of significant risks for inflation and the central bank’s intention to continue softening its monetary policy.
The situation on the currency market also remains calm. As NBU Governor Valeriya Gontareva stated at a press briefing, the current account balance of payments in Ukraine this April has returned to surplus after a deficit in March, as due to improved situation on foreign markets for Ukrainian exports, the average daily volume of currency supply on the interbank market grew from $171 million in January to $231 million in May.
The population also continues to bring in the currency - net sales of cash foreign currency since year start has reached $1.1 billion. This has allowed the regulator since mid-March to carry out 26 currency purchase auctions in the interbank market and a single intervention at a fixed rate, which resulted in a net purchase of foreign currency by the regulator exceeding $1 billion.
Given this calm in the foreign exchange market, the National Bank last week has pleased the businesses with the next portion of indulgences in the currency market. Since May 25, the regulator has simplified the procedure for the return of foreign investment, allowing the investor to not file the written confirmation of the actual receipt of currency in Ukraine.
On the proposal of the European Bank for Reconstruction and Development, the NBU has simplified foreign exchange transactions on credit agreements concluded by residents with the international financial institutions in relation to control over risk activities. In another decision taken last week, the National Bank reduced from two days to one day the required term for the banks to deposit funds in national currency to purchase foreign currency on behalf of their clients. The innovation will be introduced from June 1.
In addition, the National Bank once again announced a further easing of restrictions. The NBU chief said the regulator planned to lift the ban on repatriation of dividends and has already begun to assess their volumes.
"We are now processing the data provided by banks on their accumulated dividends for 2014-2015. We do not see large amounts of dividends, since these were not the most profitable years for business. Therefore, we hope that we can satisfy all demand this year," said Gontareva warning that the ban would be lifted after the resumption of cooperation with the International Monetary Fund.
Ambiguous statistics

Meanwhile, the statistical data released last week are not clear enough. The State Statistics Service reported that the growth of the industry in Ukraine in April 2016 slowed down to 3.5% in annual terms, while growth was recorded for the third month in a row, after a trend reversal in February for the first time in the last three years. The largest production increase compared with April of last year was recorded in manufacture of coke and refined petroleum products – by 26%, metallurgy – by 15.5%, manufacture of rubber and plastic products – by 13.7%, pharmaceuticals – by 12.6%, coal and lignite mining – by 11.5%.
As noted by chief economist at Dragon Capital Olena Belan, the indicators of the real sector in April indicate that the pace of recovery in the export-oriented and consumption-oriented industries is low or close to zero. "However, steady growth in the construction industry is encouraging, supporting our view that the investment will be the main driver of economic growth in the coming years. We expect real GDP growth at a moderate 1% yoy this year, with further acceleration to 2.5% in 2017," the expert said.
It was pleasing to find out that the State Statistics recorded a decrease in loss before tax at the large and medium-sized enterprises in the first quarter by 6.6 times compared to the same period last year - to $58.6 billion. The share of unprofitable enterprises in the first quarter decreased by 6.9 percentage points to 39.7%. The biggest share of unprofitable enterprises was recorded in the sectors of arts, sports, entertainment and recreation, real estate transactions, transport, warehousing, postal and courier services.
Meanwhile, the banking system continues to generate losses: total loss of n operating banks, excluding the insolvent ones, amounted to $11.5 billion as of May 1, 2016. But at the same time, the NBU noted the positive trend, since this figure is 17% lower than on May 1 of the previous year. A total of 34 operating banks recorded losses over four months of 2016, while at the same time twice as many, or 75, banks made a profit in January-April.
New bankruptcies

Despite the improved performance, the banking system continues to go through painful purging. Since the beginning of 2014, the NBU declared insolvent over 70 financial institutions. Last week, the National Bank issued two decisions for the withdrawal of banks from the market. While the first decision - on the recognition of a small and unremarkable Smartbank insolvent due to the non-transparent ownership structure - does not raise any questions, the second case is a real thriller.
This is about Mykhailivskiy bank that the NBU urgently recognized insolvent due to suspicious transactions with deposits of individuals. According to the regulator, the bank has been problematic since December 23, 2015, and, apparently, has been making a significant effort trying to resolve the issue.
As a result, head of Mykhailivskiy bank Ihor Doroshenko on May 20 left his post, and the same day the bank limited the access of the NBU curator to its database citing a “technical failure” and held a number of suspicious transactions to transfer retail deposits from companies related with this bank, increasing the load on the Individual Deposits Guarantee Fund by UAH 1 billion – to UAH 2.6 billion.
The NBU has pledged to involve law enforcers in the investigation and said it intended to challenge the additional burden on the Guarantee Fund. But, apparently, the search for the perpetrators could be delayed, since on the day when the bank was recognized insolvent, its key owner Viktor Polishchuk, who also owns a home appliances retail network Eldorado, said that several days ago, he sold his share in the Mykhailivskiy bank's capital to a group of individual investors. In turn, former head of the bank Ihor Doroshenko from  May 23 took up the post of a chief executive officer at the Cyprus-based PT Platinum Public Ltd, which owns Platinum Bank.
The major loser in this story of a “spectacular” bankruptcy is the Individual Deposits Guarantee Fund, which over the period of May 24 - May 25 received a load of requests from the customers of the Investment and Settlement Center on funds return. The depositors of this company concluded deposit agreements via a proxy – Mykhailivskiy bank. The Fund has already warned the applicants that there might be a big problem with funds return, as the company named the Investment and Settlement Center is not a banking institution and a participant to the Fund, therefore these deposits are not guaranteed by the State.
In addition to trying to pull from the Fund an extra billion, Mykhailivskiy bank considerably cleaned up their assets just a couple of days before the introduction of provisional administration. It signed agreements on reassignment to other financial companies of rights to demands on its loans.
Meanwhile, in addition to a standard care scheme of banks’ withdrawal from the market, there emerged a new trend – self-liquidation on the initiative of the owner. Last week, the shareholders of a small Finance Bank, the biggest of whom is a citizen of Ukraine Oleksandr Dovhopolyuk (40% share) reported that they could pass a decision on liquidation of this financial institution. Previously, the decision on self-liquidation was taken by the shareholders of Investment and Trust Bank, who are already waiting for the appropriate resolution of the NBU.
The reason for the banks’ "suicide" may be a requirement by the NBU to small banks to accelerate the replenishment of capital to the minimum level of UAH 500 million. According to estimates of bankers, this requirement can be a daunting task for a number of smaller financial institutions. It’s good that at least some of them had the heart to quit in a nice way, without disgraceful sham schemes against their investors and the State, as it was with Mykhailivskiy bank, the history of which is far from being over as new details are unveiling. There is no doubt that the Ukrainians will expect the law enforcers to prosecute all perpetrators involved.

No comments:

Post a Comment