Ukrainian farmers face the prospect of meeting only 70 percent of their financing needs this year, which could translate into lower harvests and food production this season.
Comprising more than 10 percent of gross domestic product and almost 30 percent of the nation’s exports, agriculture remains one of the most promising sectors. But further growth depends on access to affordable financing, which has become increasingly scarce for the capital-intensive sector, experts say.
Prices for agricultural products fell significantly year-on-year with wheat prices declining by around 16 percent and corn by 39 percent, according to a January study by Agrisurvey agency.
Meanwhile, borrowing on foreign markets got more expensive for publicly-traded Ukrainian agribusinesses, with the three major international credit rating agencies downgrading the nation’s sovereign credit rating further into junk bond territory. Local bank hryvnia loan rates are prohibitively high, reaching 19-23 percent.
Although several of Ukraine’s biggest agricultural companies refused to talk to the Kyiv Post about the issue, industry experts say the financial system is not able to provide cheap loans.
“The banks are weak in Ukraine. If the financial system was stronger I think there will be much more credit available for agriculture,” said Bogdan Chomiak, director and co-founder of Lapersa Enterprises.
Ukraine’s financial system remains burdened with non-performing loans equivalent to 10 percent of gross domestic product, or $18 billion, according to a recent Fitch ratings report. Coupled with the nation’s weak monetary policy and fragile confidence in the hryvnia, dollarization is high, the report says.
Incidentally, the central bank is estimated to have sold at least $2 billion to support the currency since January, but not without seeing it depreciate by 7 percent against the dollar, the report says. As a result, the nation’s foreign exchange reserves have fallen to a perilously low level of $17.7 billion.
Current loan rates for farmers are “very expensive and which is probably affordable for working capital needs but not for investments,” said Jean-Jacques Herve, agricultural board counselor at Credit Agricole Group.
He said the situation can be improved by boosting enough confidence in the hryvnia so that it would used as the main currency in the Ukrainian economy. “There is not enough liquidity on the currency market to have a real decline in the rate of interest for the farmers,” said Herve.
Having one of the lowest rates of non-performing loans, his bank has been a successful agricultural lender in Ukraine. Half of Credit Agricole’s portfolio consists of agricultural loans. Yet Herve says the bank is very careful when choosing clients and assessing risks, especially now.
But given the enormous potential in the sector, Ukraine has two large institutional investors: the European Bank for Reconstruction and Development and International Financial Corporation, the for-profit arm of the World Bank.
Out of more than $12 billion that EBRD has committed to Ukraine, nearly 20 percent was in agriculture. In 2013, EBRD committed $222 million to processing company Louis Dreyfus Ukraine, machinery manufacturer John Deere, seed producer Maisadour Semences Ukraine, poultry producer Myronivsky Hliboproduct, and supermarket chain Novus.
EBRD provides long-term loans in dollars and euros at 10 percent. “We do not reconsider credit agreements due to the crisis like commercial banks do, which matter a good deal for companies,” said Anton Usov, EBRD’s senior communications advisor.
To qualify for a loan, however, a company has to meet certain requirements, including transparent ownership, good financial results and an environmentally clean policy.
The IFC has invested $800 million in the sector so far. In the current fiscal year that started on July 1, 2013, the financial institution had already invested $191 million. At the end of December, the IFC provided $65 million to Frankfurt-listed Mriya Agroholding. It also provided $30 million debt financing to Warsaw-listed Industrial Milk Company.
“In Ukraine we pioneered a new product several years ago – a risk-sharing facility with a bank and an input provider to be able to increase access to finance for small and medium-sized farmers,” said Elena Voloshina, IFC’s head of operations in Ukraine. “IFC is providing long-term capital, which is rather scarce in Ukraine, and we are very willing to become a source of long-term hryvnia funding for local businesses and are working to develop the mechanism alongside other international financial institutions.”
Kyiv Post staff writer Anastasia Forina can be reached at [email protected].
