50 UAH/USD: Head of PUMB Bank on a Pessimistic Scenario for Ukraine through 2020

50 UAH/USD: Head of PUMB Bank on a Pessimistic Scenario for Ukraine through 2020

PUMB Bank Chairman Serhiy Chernenko described three scenarios for the development of Ukraine’s economy and banking system through 2020 during the CIS Bankers T10 Forum.

Reported by the ANTICOR portal with reference to the media.

According to him, the pessimistic option envisions a new wave of recession, a drop in GDP, and a devaluation of the hryvnia to 35–50 UAH/USD: “What could cause this? Failure to restore cooperation with the IMF, turning on the printing press, devaluation, etc. For the banking system this would mean a further push toward consolidation. The number of players will actually shrink further.”

Chernenko drew particular attention to Ukraine’s high dependence on external factors and the correlation with global commodity prices (including grain and metals): “This means we are sensitive both to a possible upswing driven by China, India, Africa, if it happens, and conversely to a recession. For example, one of Donald Trump’s campaign slogans was a 20-percent import tax, which would likely hit China first of all. What does a cooling in China as the largest consumer of commodities mean? It means the wave will hit us hard. In what way will it hit — it will again lead to a trade balance deficit and, accordingly, huge pressure on the exchange rate.”

At the same time, the banker stated that the baseline scenario is GDP growth roughly at the current level (+2%), moderate devaluation to 30–32 UAH/USD, which is essentially stagnation against the backdrop of the recent decline. In that case, the PUMB chairman expects gradual consolidation in the banking sector.

“Retail banking is a business of scale; significant investments are needed in branch networks and IT. In my view, the minimum threshold of retail customers at which a bank can continue to scale normally and make investments is about 1 million active customers. We have 8,8 million working in the real sector, plus a certain portion of active pensioners. Overall it will be a narrow market. That means the competition will be fierce,” Chernenko believes.

In his view, under the optimistic scenario Ukraine’s GDP would grow annually by 5–7 percent or even more, accompanied by an inflow of foreign investment. “Then the entry of new players into the banking market is possible. Ukraine’s economic potential remains very strong — including infrastructure and human capital,” the PUMB top manager noted.

Chernenko noted that in 2016 Ukraine’s GDP (90,6 billion USD) was effectively at the level of 2005 (89,2 billion USD). And ultimately the banking system returned to the level of 2005:

“Banking system capital at the end of 2016 amounted to 124 billion UAH, or 4,7 billion USD. That is less than it was in 2005. And if we looked back to 2015, capital was even lower. Thanks to recapitalization, last year we caught up to the level of 2005. If we look at the loan portfolio, the situation is even more dire — we haven’t even reached the level of 2005 yet. It was 28,1 billion USD and became 21,5 billion USD, although it increased in hryvnia terms. The situation with customer funds is better. The difference between the loan portfolio and customer accounts consists of funds held in securities, excess liquidity, etc.,” the PUMB chairman said.

He also emphasized the problem of bank capital being unprotected against devaluation. “There can be different remedies. For example, increasing the foreign currency position norm, possibly index-linked bonds, etc.,” Chernenko summarized.