At the end of the year, the National Bank published a report on financial stability. In it, the NBU analyzes the general situation in the economy and financial sector, and also gives its forecasts for 2024.
On the one hand, the National Bank is quite optimistic and believes that Ukraine’s macro-financial stability is not in danger yet. Even despite the protracted war. At the same time, the banking sector is playing an increasingly important role in supporting the Ukrainian economy, increasing lending to the population and business.
At the same time, Ukraine remains heavily dependent on international funding. And, if partners begin to cut cash payments in 2024, this could lead to a slowdown in economic growth and other unpleasant consequences — an increase in inflation rates and destabilization of the foreign exchange market.
figured out what awaits the Ukrainian economy and its financial market in 2024.
Brief results of 2023. “This year the financial sector operated in favorable macroeconomic conditions. GDP growth significantly exceeded expectations, and inflation slowed rapidly.
Macroeconomic Outlook 2024. The National Bank expects that in 2024 the Ukrainian economy will move approximately along the same trend as in 2023.
GDP growth will continue, although its pace may slow to 3.6% (data from the NBU forecast published in October), inflation will remain within single digits (about 9.8%), the foreign exchange market will be under the constant control of the National Bank, and the yield of hryvnia assets will remain attractive for both banks and their clients.
However, this is a basic positive scenario, the implementation of which has certain risks.
The most important thing is the reduction in international financial support for Ukraine. First Deputy Head of the NBU Ekaterina Rozhkova says that due to significant military costs, the Ukrainian economy in 2024 will not be able to do without money from foreign partners. But there may be difficulties with the rhythm and volume of such financing.
For example, the United States and the European Union, which are the main “donors” of Ukraine, have not yet approved funding plans for 2024. And this is a large amount of funds. Direct budget assistance to Ukraine from the United States could amount to $11.8 billion, and the support package from the EU is designed for 50 billion euros and will cover the period from 2024 to 2027.
Still, Rozhkova suggests that there is a fairly high chance of maintaining funding in 2024. At least creditors willingly agree to defer repayment of external debts. The Ministry of Finance has already held successful restructuring negotiations with a group of official creditors from the G7 and Paris Club countries. In the first half of 2024, the Ministry of Finance intends to achieve restructuring of Eurobonds and GDP warrants. In the future, Ukraine will be able to save up to $15 billion on external payments.
Another risk lies in the logistics of Ukrainian exports. Along with the problems that exist on the border between Ukraine and neighboring EU countries, Ukrainian port infrastructure is subject to regular attacks. And although the Ministry of Infrastructure reported 10 million tons of cargo that were exported in September-December through the new sea corridor (it replaced the “grain deal”), this is still not enough to establish full-fledged exports.
There may be troubles in the foreign exchange market, which will echo problems with financial assistance and exports. Everything is very simple: despite the fact that the NBU now has an excess of gold and foreign exchange reserves (about $39 billion as of December 1), the National Bank will have to reduce its influence on the exchange rate. That is, the NBU will reduce interventions in order to preserve gold and foreign currency reserves, which will lead to a weakening of the hryvnia. The official exchange rate, for example, decreased by 3% in October–December. It is clear that there will not be a quick devaluation. But this process is clearly inevitable.
What awaits the financial market in 2024 ? The NBU is not particularly worried about the financial sector in general and banks in particular.
Ekaterina Rozhkova believes that the interest margin (income from certificates and government bonds) will allow banks in 2024 to generate profits sufficient to maintain the required level of capitalization. Although the profit margin will decrease due to new tax conditions (from January 1, 2024, banks will pay income tax at a rate of 25% instead of 18%).
Rozhkova also announced the preliminary results of stress testing of the 20 most significant banks. “The level of capitalization is more than sufficient. And banks are quite resistant to the challenges and possible risks that will persist in the future,” said the deputy head of the NBU.
Only five banks need additional capitalization. Moreover, two of them have already fulfilled the increased capital requirements, and another 3 banks will develop plans to replenish capital.
The NBU expects banks to be more active in lending to the economy. We are talking about loans both to business (the main borrowers are trade, agriculture, transport and logistics, energy) and to the population (mainly loans without collateral and mortgages under the eOselya program).
“ Thus, when generating bank profits, along with interest income from certificates of deposit, the role of lending increases (strengthens). This trend will continue in 2024. Against this background, due to the easing of monetary policy, the interest margin will decrease,” says Pervin Dadashova, director of the NBU’s financial stability department.
The National Bank did not forget about the participants in the non-banking market. For them, fundamental changes in regulation will occur in 2024. This is due to the entry into force of three laws at once — “On financial services and financial companies”, “On insurance” and “On credit unions” — and several regulations of the NBU.
These events will lead to further transformation of the non-banking sector. The hardest thing will be for insurance companies, which are the most significant part of that market.. According to Rozhkova, about 40% of companies do not meet the capital and solvency requirements that will come into force on January 1, 2024. Insurers will have six months to bring their activities into compliance with the new rules. Otherwise, the insurance market will face a large-scale purge that could affect even those companies that are among the largest players.