Transcript of a Press Conference on Economic Program of the Ukrainian Authorities, With Ceyla Pazarbasioglu, IMF Mission Chief to Ukraine
February 27, 2009With Ceyla Pazarbasioglu, IMF Mission Chief to Ukraine
Washington, D.C., Friday, February 27, 2009
MS. LOTZE: Good day, everybody. Welcome to this conference call on Ukraine with the IMF Mission Chief, Ceyla Pazarbasioglu. I’m Conny Lotze of Media Relations.We don't have any documents to hand out, but there will be a transcript of this call posted on our website later, and I will have a sound file of the call, an audio file, right after this briefing.
Ceyla will have some opening remarks, and then we will turn over to your questions. Thank you very much. Ceyla?
MS. PAZARBASIOGLU: Thank you, Conny. Hello, everyone. Thank you very much for listening in to this conference call. I should start by saying that we are very encouraged by today's meeting of the authorities—the key decision makers—and their determination to move their economic program forward. We have already discussed it with key officials, and we are very glad to hear about this process. We will continue to consult with them on the next steps and the measures that will pave the way for the conclusion of the first review under the Stand-By Arrangement. We are looking forward to continuing our discussions with the authorities next week in preparation for our return to Kiev.
I should also note that we have an excellent dialogue with the authorities. In the last two weeks, since returning back from Kiev, we have had several very productive conference calls with the Prime Minister, her team, the Ministry of Finance, the Presidential Secretariat, and the National Bank of Ukraine.
As you know, we are in the midst of a global financial and economic crisis. And everyone is looking for ways to address the challenges they are facing. And every day, we are confronted with new challenges, new issues that need to be addressed.
As President Yushchenko noted today, we have been working on a draft Letter of Intent. The authorities confirmed to us and also to the press earlier today that they will send us comments early next week that will form the basis of our discussions when we go back to Kiev.
In the last few weeks, our discussions with the authorities have focused on the implementation of a comprehensive Bank Resolution Strategy, which is a key component of the program; exchange and monetary policies; and the appropriate fiscal stance for 2009. And I would briefly like to mention to you where we stand vis-a-vis each of these issues.
You have heard these also from the authorities, so there is not that much new, but I thought maybe you would like to hear it from our perspective as well.
We strongly believe that resolute implementation of the Bank Resolution Strategy is key to restore confidence in the financial sector, to start bank lending, and to facilitate economic or recovery.
This is very important for Ukraine. And, as you know, in many countries, authorities are trying to address the challenges faced by the banking system.The National Bank of Ukraine should be commended for designing and professionally implementing the diagnostic phase in line with international best practices.
I should note that these diagnostic studies were conducted by reputable audit companies for each bank based on agreed-upon principles which were designed by the NBU. These audits included stress tests to identify potential capital needs under adverse macroeconomic conditions. As you know, these were designed in October and November, and, again, I think the NBU deserves credit for going ahead with the methodologies that are being considered by some of the industrial countries today.
Based on the results of the diagnostic phase, the NBU conducted discussions with the largest 17 banks, accounting for about two thirds of the total banking sector assets. And most of them signed an agreement pledging to raise capital. The next phase of the bank recapitalization program involves potential public recapitalization support to viable banks in the context of an acceptable business plan.
In this context, we believe it is very important to appoint a high-level official, authorized by all coalition partners, to coordinate together with the National Bank of Ukraine the implementation of the Bank Resolution Strategy.
In terms of exchange rate policy, a consistent implementation of a flexible exchange rate regime is very important to cushion the economy and against the large external shocks it has been facing and it still faces.
The credible implementation of the monetary policy in the context of the floating exchange rate arrangement requires a strong and independent central bank, together with a very sound communications strategy.
However, the NBU’s efforts have been hampered so far by political interference, as well as numerous and, at times, conflicting public statements by various officials, participants, and so on about what the exchange rate should be, what banks are facing which issues and so on.
Given the fragility of public confidence, we believe it is of key importance that such statements are made by high-level NBU staff only; and that others respect this and allow the key policymakers—in this case, the National Bank—to make statements on such important issues.
Regarding fiscal policy, the deeper recession that has emerged since the inception of the authority’s economic program in October justifies a revision of the program’s initial target. We already mentioned that in our press statement before leaving Kiev. The initial program had a balanced budget for 2009, but this is actually misleading, because the program has adjusters for bank recapitalization costs, which are expected to be about four and a half percent of GDP maximum, and any infrastructure investment financed by IFIs.
in October, when the program was designed, it was a preemptive bank recapitalization strategy, and the need for infrastructure investment, which was built into the program. However, since October, the global conditions have deteriorated. The economic and financial conditions of the major trading partners of Ukraine have deteriorated.
Given these conditions, we had minus three percent outlook for growth in 2009. We have revised it to minus six. We may need to revise it, given the continuing deterioration of the trading partners of Ukraine. A balanced budget, given the sharp decline in revenues, does not seem feasible at this point in time. However, it is very important to keep the government deficit at the level consistent with available, and non-inflationary financing. In this regard, we are fully supportive of the authorities’ efforts to raise additional funding from multilateral and bilateral creditors.
We have been collaborating very closely with the World Bank. And if these efforts are successful, a higher deficit than originally envisaged, based on realistic macro assumptions, it can be built into the program to soften the economic downturn while making sure that the medium-term sustainability of government finances are preserved. In this context, fiscal corrective measures are needed, as mentioned by the Prime Minister earlier this week and the President today; that these include improving the financial situation of the pension fund and actions to reduce the structural deficit of Naftogaz.
The authorities are also taking measures to ensure that the most vulnerable are protected through well-targeted social safety net programs, which is, again, a key component of the IMF-supported program as well.
I’ll stop here, and take questions. Thank you.
QUESTIONER: Thank you for the briefing, I simply didn't hear what you were saying. What are you expecting next week to come from the authorities in the Ukraine? What documents that will be a basis for further discussion?
MS. PAZARBASIOGLU: Right. The first step is a joint declaration by the authorities to show their commitment and determination that they will collaborate and move the economic program forward. Today’s meeting was an important development and we are encouraged by it.
The authorities are now working on the concrete actions to manage the crisis, and, as the President announced earlier today, they expect to come back to us early next week with their suggestions. As you can appreciate, this is their own program.
Based on these discussions, we hope to go back to Kiev in the the coming weeks. I also understand that the authorities will put to parliament the legislative changes which would allow them to correct the fiscal situation, especially in terms of the pension fund and other issues.
QUESTIONER: And secondly, if I may, more substantively, what do you say to those who say that the program was under-funded to begin with for Ukraine. And even if it was not under-funded, how likely is it that the Ukrainians will soon enough get the money, either from the program or from the bilateral donors whom you mentioned to tide them over for the time being, because I understand time is of the essence here.
MS. PAZARBASIOGLU: Right. The program, when designed in October—and even now—is not under-funded in terms of balance of payments needs, which is what the IMF provides financing for. And from that perspective, the program remains well diagnosed and properly funded.
However, what one has to acknowledge is since October, with the recession, it has become very difficult for Ukraine to sustain the fiscal balances, because, as you know, with a recession, revenues come down, and even though the budget may be stringent, it has a large component in wage payments, pension payments, and other social transfers. Therefore, to be able to meet these budgetary needs, additional financing is necessary.
With the banking system in a fragile condition—depositors are still taking out their deposits from the system—and as confidence to the system has not yet returned, it is difficult for the authorities to finance the deficit by borrowing from domestic sources.
As you know, private external financing sources are closed to most countries because of the global financial de-leveraging and financial conditions. This implies that the only option for Ukraine to be able to run a budget deficit is to monetize it. And, as you know, this has very significant implications for exchange rates and inflation and so on.
Therefore, as I said in my opening remarks, we support the authorities efforts to raise additional financing. However, this has to be complemented with structural measures to ensure medium term fiscal sustainability.
QUESTIONER: I would like to ask you what is the main question that the Ukrainian authorities need to accomplish to receive the second tranche of the credit. The Ukrainian authorities seem to be very optimistic about their chances to get the money. How do you assess this possibility? So which development is more likely to happen? Thank you.
MS. PAZARBASIOGLU: The authorities—as we have seen from the discussions today, including the Prime Minister, the President, the central bank, and even the opposition—are in the process of putting together their own anti-crisis package and measures.
If the authorities provide assurances that they are committed to the program and take the measures that will be important to restore macroeconomic and financial stability, the IMF will be supportive.
QUESTIONER: What about the budget deficit?
MS. PAZARBASIOGLU: As I just tried to explain to the first questioner, the budget deficit, because it was designed in late December and based on November projections, is based on optimistic growth and thus revenue figures.
As the President already mentioned today, the budget needs to be assessed in a more realistic framework. In this context, some fiscal corrective measures are necessary so as to avoid inflation and pressures on the currency. If the authorities implement some legislative changes which could lead to fiscal savings, then we would be ready to discuss a higher deficit than the one percent we were discussing back in Kiev. We need to have a medium-term perspective and assess the fiscal framework accordingly.
QUESTIONER: I mean, up to three percent? Up to five percent?
MS. PAZARBASIOGLU: I don’t think it’s good to speculate right now. We are discussing these issues with the Authorities. I don’t think it helps anyone to put figures down now, because the starting point is different.
The authorities have, as you know, a growth forecast of 0.04 percent of GDP. Our growth forecast is different from that, which implies different projections for revenues and a different deficit than what is in the budget right now.
As I said, the objective is to ensure that the fiscal balances are sustainable, and that it’s financed through non-inflationary means. The key challenge is how to reach this objective without having to resort to very harsh austerity measures. In this context, it's important to be able to mobilize some additional financing.
I don’t think it helps to talk about a specific figure at this point in time. I think what you should take from this is that the objective is to come up with measures, with additional financing, and a fiscal stance which would mean that the end result is not inflationary and that there are no major harsh measures for people. How we get to that, we will have to see in the coming weeks.
QUESTIONER: How much external financing do you think that Ukraine is going to need to be able to comfortably deal with the budget deficit of three percent or more?
MS. PAZARBASIOGLU: The Prime Minister, in her press briefing, pronounced about US$5 billion in additional financing. I think this would be comfortable for them, to be able to reach a public finance stance as I just discussed before. But in our projection, even more limited amounts would allow them to reach a fiscally sustainable stance.
QUESTIONER: Have you spoken about limits on the currency reserve and has that changed at all?
MS. PAZARBASIOGLU: You mean the international reserve target?
QUESTIONER: Correct, yes.
MS. PAZARBASIOGLU: No; the authorities have been adhering to those targets so far, and there has not been much discussion on this issue yet.
QUESTIONER: Okay. And when are you going back to Kiev?
MS. PAZARBASIOGLU: We are hoping to hear from the authorities early next week. I understand that next week is a busy week for them, with some discussions at the Parliament, some key appointments.
QUESTIONER: I just had a question about whether you expect that there would be much possibility at all of Ukraine getting money from private sector lenders, or just to clarify your position, is that now looking extremely unlikely?
MS. PAZARBASIOGLU: What I meant by that is that domestically it’s difficult because Ukraine does not have a domestic institutional investor base. The banking system is recapitalizing and trying to deal with its own challenges. So domestically, it’s difficult to raise financing.
Externally, the CDS spreads have been very high, and therefore, the cost of financing externally from the private sector is currently very costly. Once the authorities make progress in their anti-crisis measures, I would hope to see those spreads come down, because I think they are rather exaggerated, from our perspective. But as the cost of financing comes down, and as the global financial situation improves, I would think there would be much more interest in the country which has enormous potential.
I have seen in the news some real sector companies increasing their presence in Ukraine. I would think that with a large population and demand, there would be more private sector involvement going forward.
At this point in time, the private sector is trying to assess the commitment to reform, the crisis management strategy, not only in Ukraine, but in all other emerging market countries. This will be crucial to determine whether and how much access to private sector financing will be feasible.
In terms of foreign banks which are currently present in Ukraine, they have so far signalled commitment. They have announced that they are recapitalizing their banks. The parent banks made specific announcements that they are committed to roll over the debt that is owed by the subsidiary. These are all positive news. Obviously, equal treatment of banks by the NBU and the authorities will be critical to maintain this type of positive approach from the foreign banks. And in that context, the NBU has to make sure that its operations are transparent, that they’re equally provided to all banks; and my understanding is, the NBU has been working on that.
QUESTIONER: My question is, what do you think are the main risks for the banking system this year, specifically with regard to consumers likely to default on their mortgage loans denominated in dollars? Thank you.
MS. PAZARBASIOGLU: I think this is a very good question, but a very difficult question to answer. This question applies to many countries in the region as non-performing loans are increasing due to exchange rate changes or unemployment increases or other reasons which affect the payment capacity of the borrowers.
In the case of Ukraine, my understanding is that the banks have been working closely with the borrowers to be able to provide terms for restructuring these debts in terms of lengthening maturities and so on. There was an effort coordinated by Minister Pynzenyk in December, and the NBU has also been working on this.
The bank recapitalization program was precisely built on possible deterioration in foreacsts as the economy goes through a more difficult time—that is, the banks would need additional capital to be able to roll over their loans or restructure their loans to avoid a capital crunch and/or a credit crunch.
From that perspective, I think Ukraine is in a good position, having done the diagnostics, having allowed the banks or asked the banks to recapitalize themselves so that they are in a much better position to agree with the borrowers on new terms—which is basically burden sharing. The borrowers can agree to terms which would allow them to pay back, and that way the banks can benefit from continued payment on these loans.
I think it is a challenge which will require some coordinated action, and also from the authorities’ side it will be necessary to monitor closely and make sure that there are standardized contracts, and that the banks are in a good position to be able to roll over or restructure these loans.
It is important that the government, together with the NBU, puts together such a strategy. There has been some work on it, but I think more needs to be done going forward.
QUESTIONER: Is there a critical percentage for these non-payments after which basically the system is going to collapse or—I mean didn’t you give this 30 percent stress-figure to the banks? Is there a critical point beyond which it’s unrepairable? Thank you.
MS. PAZARBASIOGLU: The banks have worked on diagnostic studies based on stress tests (with the depreciation of the currency, the decline in GDP, and so on). The banks’ non-performing loans have been increasing, but I believe they are still below the levels reached as a result of the stress tests. If the banks are recapitalized, they will be more likely to be able to restructure thir loans.
We have looked at many other countries’ experiences, and the key lesson from bank restructuring is prompt resolution—good diagnostics and prompt capitalization of banks. This will allow, as I said, to agree on terms to lead a voluntary restructuring of debts, and therefore, make it possible for non-performing loans to moderate.
QUESTIONER: I just wanted to ask you whether you had a reaction to the size of the commitment that the EBRD and the World Bank announced this morning for central Europe in light of some of the sort of estimates that you have of the external financing needs in addition that Ukraine would need to, you know, for sort of an acceptable deficit figure to be arrived at and so on?
MS. PAZARBASIOGLU: My understanding is that this will provide support to the parent banks in order to capitalize their subsidiaries.
QUESTIONER: I was wondering if there’s been any discussions regarding Ukraine’s currency, the difference between the official and the market rate?
MS. PAZARBASIOGLU: We have been discussing these issues with the Central Bank. As you know, the authorities committed to ensure that the official exchange rate is in line with the market exchange rate.
The authorities have introduced in November foreign exchange reserve auctions which is a transparent process. We have to also acknowledge that, in the case of Ukraine, in the last few months, there have been so many public statements about what the exchange rate should be or what it is and all sorts of announcements, that this has triggered a major move towards foreign currencies.
It is very important that the communication strategy is left to the Central Bank, that the others refrain from making comments about what the exchange rate should be. After the discussion today of the President, the Prime Minister, the opposition party, and the Central Bank, the President did say that, going forward, it will be important to allow the institutions responsible to make the necessary announcements about the policy rates or the exchange rate policy.
Under such circumstances. with the tools available to the National Bank and confidence returning to the system, we should see much better practices going forward.
QUESTIONER: Could you maybe just speak more generally about how dire the situation is? I mean we can read into the figures, we can see what’s going on. I mean from your experience, I mean how dire is the situation in Ukraine? And speed seems to be the big issue here, and you know, how quickly they can access that external financing, as well, is another issue. Do you have anything to say on that?
MS. PAZARBASIOGLU: Well, I think the situation in the world is dire—here in the U.S. for example, the situation is very challenging. Compared to a few months ago, many countries are going through a difficult time. The economic projections keep being revised down. Even countries which were seen as immune from the crisis, have been hit. The exports of many of the Asian countries have been declining sharply, in some by about 40 percent.
Ukraine was impacted early on because of the decline in steel price—steel price declined by 60 percent between July and October—and this industry is about 40 percent of their exports.The authorities reacted fast and approached the Fund for support in October. At the time, it looked like some of the challenges may be temporary, but it looks now that global financial and economic problems are going to be more protracted. This makes Ukraine’s challenges difficult.
But we think that these challenges are manageable but the key is to agree on a strategy and to implement it. But we should all accept and acknowledge that the challenges are significant. It’s difficult for people, it’s difficult for the industry, because the last five years we were in a booming economy, and everyone could borrow, and all that has changed now. The country needs to adjust to the new circumstances and sacrifices will be necessary to manage the way out of the crisis. This can only be accomplished with good crisis management and adequate decision making.
OPERATOR: And I have no questions in the cue at this time. I’d like to turn the call back over to management for any closing remarks.
MS. PAZARBASIOGLU: All right. Thank you very much for listening in. These are difficult times for everyone concerned. And I would like to end with a positive note that we are encouraged by today’s announcements by the authorities about their determination to move forward with the program, working together with the opposition. We do hope this will be the case going forward as the country needs such a coordination and urgent and decisive action. As the IMF, we have been very supportive of Ukraine, and we will work with the authorities to minimize the impact of the crisis. Thank you.
MS. LOTZE: Thank you very much. We conclude the conference call here.