After another year of rollercoaster Ukrainian politics, 2008 began with cautious optimism. The triangle of rapid private consumption, influx of foreign capital and soaring inflation are all key variables which will define Ukraine's financial stability throughout much of this year, and the banking industry is dependent on the sustainable balance of these factors.
The rise in wages is fuelling an ongoing burst of consumption activity. According to private equity firm SigmaBleyzer, household disposable incomes soared 12.1% during the first ten months of 2007. With more money in their pockets, Ukrainians have demanded more credit from an expanding banking industry, which remains underdeveloped compared to other east European countries. According to Jacques Mounier, president of Calyon Bank Ukraine, growth in the banking sector may top 60% this year.
Along with economic growth as a whole - which is expected to be higher than 6% in 2008 - the consumer boom allows for considerable prospects for banks to diversify their activities. Banks are shifting strategies to meet the demand of consumers, creating structural changes in the economy.
On December 28, Raiffeisen Bank Aval announced it had increased its capital by $297m, to $451m, as a result of a share allocation. In January, Ukrsotsbank - the country's fourth-largest - will place a $99m bond to boost its loan and investment portfolios.
Foreign banks and investment banks will continue to clamour into the banking industry throughout much of 2008 to strengthen their international positions and establish a foothold in the East European market. Late December, Israel's Hapoalim signed an agreement to buy 76% of Ukraine's oldest private bank Ukrinbank for $136m. Ukrinbank, which focuses mainly on financing small and medium-sized businesses and private customers, is now one more foreign entry into the banking industry.
In France, local media reported this month that Société Générale is ready to snap up an unnamed Ukrainian bank specialising in consumer credit. The multinational hopes to expand its ProstoFinance subsidiary, which was established in Ukraine in 2006. Additionally, Corrado Passera, Italian bank Intesa Sanpaolo's chief executive, hinted that a Ukrainian acquisition would be on the table for this year. Ukraine expects to join the World Trade Organisation (WTO) in the first half of 2008, prompting a future wave of European entries.
On December 20, global investment giant Goldman Sachs bought an undisclosed stake in Dragon Capital, the largest broker on the Ukrainian PFTS stock exchange. According to Tomas Fiala, managing director of Dragon Capital, "We've received interests from many Western investment banks wanting to take a minority holding or strategic stake. We decided having Goldman Sachs on our shareholder register would add the most to our business."
There are downsides for the economy, however, from Ukraine's consumer credit and banking boom - the spectre of double-digit inflation. While Ukrainians enjoy spending higher salaries, the consumer price index skyrocketed 16.6% in 2007. In response, the National Bank of Ukraine (NBU) hiked its key short-term interest rate by 200 basis points to 10% at the beginning of January. Meanwhile, the NBU is tending to the difficult task of keeping the hryvnia stable against the ever-depreciating US dollar.
In Ukraine, political factors often control fiscal policy and in turn the banking industry - often at the expense of prudent financial policy. First Deputy Chief of the Presidential Secretariat Oleksandr Shlapak stated to the Ukrainian press, "The government and business executives should simply make more scrupulous calculations and more realistic forecasts."
Ironically, political inertia throughout 2007 prevented the Verkhovna Rada from introducing "regulatory surprises" on banks, despite the fact that little was done to bring Ukraine closer to Western practices.
The first weeks of the New Year hint that fiscal tightening is not on the agenda. On January 9, newly elected prime minister Yulia Tymoshenko inaugurated a campaign to repay Ukrainian citizens savings lost due to the collapse of the Soviet financial system. Ukrainians lined up in queues on January 11 to collect a maximum of 1000 hryvnias ($198).
The programme, which will inject $4bn of cash into the economy, is certain to push double-digit inflation even higher. Critics have charged this move as a populist trick to win support for Tymoshenko's 2010 presidential bid.
