You're reading: Citibank’s Fisher: ‘Not good economic policy to keep people guessing’

After several tough years, the banking sector is ready to start financing Ukraine’s economic growth once more, says Steven Fisher, CEO of international banking giant Citibank’s operations in Ukraine.

But for that to happen, Fisher explains, the central bank will have to abandon its tight liquidity policy aimed at keeping the hryvnia exchange rate stable.

Some foreign banks are deleveraging, looking to reduce their operations, cut down on staff or sell off branches, said Fisher. Others have run into troubles at home or are simply still recovering from the consequences of having purchased existing banks for too high a price, given their problems with bad loans, corruption and excessive costs.

But the current monetary policy is also holding the sector back, argued Fisher, who came to head Citi’s Ukraine operations in 2010, after having ran corporate lending in the post-Soviet area from Moscow.

Among the policies used by the National Bank of Ukraine to restrict banks’ liquidity, Fisher mentioned the sale of government bonds to banks and raising overnight rates to 20-25 percent. It is also limiting the use of repurchase agreements, he said. Known to bankers as REPOs, such transactions are used by banks to balance their assets and liabilities.

“The NBU is very, very selectively offering REPO. All banks have the right to REPO transactions with the central bank, but the central bank in the last six months has very sparingly done these,” Fisher said. “Obviously, we all know the reason why. At least until after the elections this policy will strictly continue because it’s the government policy to keep the exchange rate stable.”

The question, he said, is what happens after the elections: sudden devaluation or a gradual change? Fisher favors slow devaluation, but emphasizes the need for clear statements from the central bank in any case.

“It’s not good economic policy to keep people guessing. Because, usually, if you state something in advance, people and markets know how to react, and companies and individuals know how to plan,” he said.

Steven Fisher, Citibank CEO

Right now, there is too much uncertainty, he added, which is why people are afraid to keep hryvnias in banks. So they exchange them for dollars. In September alone, Ukrainians bought $1.8 billion worth of dollars, which is 2.5 times more than in August, the National Bank reported this week.

Holding on to cash is hurting the economy at large, causing rates on deposits and loans to spiral up in a vicious cycle. “If you’re not getting liquidity from the interbank system or the central bank, then your primary source is deposits, and the only way to attract deposits is to pay more for them,” Fisher said.

“Imagine you’re a small or medium enterprise, and you have to pay fairly high borrowing rates anyway,” he argued. “When banks add the margins to reflect the risk of that class of borrowers, on top of these already much higher base borrowing costs: what SME company can afford to pay 30 percent?”
While some big companies are still investing, a lot more of this activity can be taking place, the banker noted.

This year’s dynamics on the capital markets, both in terms of debt and equity issues, for instance, have been disappointing. Indeed, not a single notable deal has surfaced, with companies deciding to hold back on any potential eurobond or share issues until more favorable market conditions arise, Fisher noted.

“There was virtually no eurobond activity this year, and because the equity markets were very unstable and the risk factor associated with Ukraine is high, there were virtually no equity issuances this year,” he deplored. “The markets were basically closed for Ukraine.”

Nonetheless, the banker is upbeat about next year’s prospects: the government’s borrowing costs are falling, while credit-default swaps, a measure of the “country risk” margins that companies see added to their rates, have recently hit 12-month lows. At the same time, foreign stock markets are picking up.

Whether or not Ukraine benefits from this, depends on what happens after the elections, Fisher said. The most important issue is a new deal with the International Monetary Fund, even if that means hard choices for the next government. Obviously, he added, if any fraud occurs during the voting, that “would be a very negative signal.”

“If certain things play out in a positive way for Ukraine, we could have a good year, with market access restored,” Fisher said.

Kyiv Post editor Jakub Parusinski can be reached at [email protected]