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bne April 2019 Companies & Markets I 17
are mostly Russian banks that have been sanctioned by the NBU and are barely functioning. Best off are the private banks where a quarter of their loan book has gone bad, but that is
a manageable, although still big, share of loans.
While banks are struggling to shed their bad debt, where they are making progress is in restructuring this debt and reducing the amount of capital they have to put aside to cover it. In
“The cost of borrowing is so high that projects are not economically viable if the investment capital has to be borrowed”
2018, the amount of payments to reserves more than halved, to UAH 23.7bn in 2018 from UAH49.2bn in 2017.
However, the wobbly nature of the banks' balance sheets is holding back the business. In the last two years deposits have remained largely flat as have bank loans.
Companies make up the bulk of loans and increasing the resources for companies to borrow would feed economic growth. But in the wake of the economic crash the NBU had to hike rates and at its meeting on March 14 kept them at a punishing 18% as the fight against double-digit inflation is still taking priority. At this level the cost of borrowing
is so high that projects are not economically viable if the investment capital has to be borrowed.
Retail lending remains very depressed for much the same reasons. In Russia’s boom years the consumption led boom was fuelled by soaring consumer credits, which in turn were fuelled by steadily falling borrowing costs.
Ukraine has a consumer borrowing fuelled boom to look forward to, but clearly it is still too early for this to start and interest rates need to come down a lot more before this particular virtuous circle of borrowing-spending- investment-profits-wage hikes starts turning.
Ukraine corporate NPLs and retail NPLs UAH mn
Ukraine's net FDI grows $690mn in 2018, but investment needs are ten times higher
bne IntelliNews
The stock of foreign direct investment (FDI) into Ukraine in 2018 grew 2.2% y/y to $32.3bn as of end-2018, a net increase of $0.69bn, the State Statistics Service reported on February 28, but investment needs for a full economic recovery are up to ten times higher, according to the acting Minister of Finance Oksana Markarova.
At the same time the increase in FDI in 2017 was revised upwards to $380bn, while the 2014-2016 drop in FDI stock was reduced $22.5bn.
Gross 2018 FDI inflow amounted to $2.87bn, while the outflow was $0.97bn. The agency wrote off $1.22bn from inflows due to exchange rate fluctuations, omissions, and changes in classification. In 2017, gross FDI inflow amounted to $2.51bn, while the outflow was $0.76bn.
In 2018, the Netherlands ($1.2bn), Cyprus ($0.5bn), and the Russian Federation ($0.5bn) were the leading sourc- es of investment in Ukraine in 2018. The top recipients were the finance ($1.2bn), trade ($0.6bn), and real estate ($0.4bn) sectors.
“Investment inflow only slightly improved in 2018,
with a long way left to cover the losses of 2014-2016. Unfortunately, FDI won't improve much in 2019 given the heightened political risks related to the presidential and parliamentary elections scheduled for this year.
We expect gross FDI inflow this year will be close to last year's result of $2.9bn,” Evgeniya Akhtyrko of Concorde Capital said in a note.
The result is very disappointing as while inflows are wel- come, the level of inflows is well below what is needed
to rebuild the tattered economy. Pre-Crimea, experts estimated Ukraine’s investment needs to be on the order of $15bn, but since the start of a military conflict backed by Russia and a deep economic crisis economists put the needed funds at closer to $75bn now.
The acting Ukrainian finance minister said on February 18 that Ukraine needs about $10bn a year of investment, against the approximately $2.5bn it is actually getting, if it is to recover.
Markarova calledfor the effective privatisation of state property and a better business climate to attract such investment.
Source: NBU
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