Peter Baron, CEO of Ukraine’s VAB bank, says that a chain reaction of international and domestic events has made borrowing costs more expensive for domestic banks and has even led some to stop lending in order to stop the outflow of capital.

After nearly a decade of declining interest rates in the wake of bullish economic growth, borrowing in Ukraine is getting more expensive, analysts say, suggesting the country’s economy is on the brink of a credit crunch.

While not as severe, nor directly connected, to the global credit squeeze that was triggered by risky subprime loans in the United States, borrowing in Ukraine is indeed getting tighter. The trend is not expected to make a significant dent on households, but it will be felt by the economy. Less certain is how serious, analysts added.

“We have identified the industry, trade and transportation sectors as having the largest exposure to the credit crunch so far,” reads a report by Kyiv-based investment bank Dragon Capital. “Although these sectors represent Ukraine’s major growth drivers, the risk of an economic downturn may not materialize.”

Lending has become more expensive this year, with annual interest rates rising from February-April by 3 percent, up to 16.9 percent for an average loan denominated in hryvnia, according to Dragon Capital.

That rate is close to the government’s latest projection of 16 percent annual inflation rate this year.

Dmytro Boyarchuk, executive director of CASE Ukraine, a think tank, said the imminent credit crunch being felt in Ukraine could cut annual GDP growth by almost 1 percent over the next two years. The center has adjusted its earlier 6.5 percent annual GDP growth forecast to 5.8 percent.

Citing figures from recent months, analysts say banks have put the brakes on years of aggressive lending practices. According to the National Bank of Ukraine, in May 2008, the total volume of loans issued to individuals increased by just 0.7 percent to $38.7 billion, month­to­month.

It’s a definite slowdown, analysts said, compared to April, when the volume of lending to individuals increased by 4.5 percent. In May, lending to legal entities increased by 1.1 percent, hitting $64.4 billion, down from a 1.9 percent growth rate the previous month.

Roots of Ukraine’s credit squeeze

Analysts cite several root causes for Ukraine’s credit crunch. For one, international lending tightened up, restricting access to foreign capital that Ukrainian banks aggressively borrowed to boost growth. Ukrainian banks in recent years borrowed record amounts from abroad, re­lending domestically at higher rates.

According to National Bank of Ukraine statistics, Ukrainian banks in 2006 borrowed from abroad by almost 2.3 times more than in 2005, and the total debt amounted to $14.1 billion as of Jan. 1, 2007. By Jan. 1, 2008, the total foreign debt accumulated by Ukraine more than doubled to $31.0 billion.

It seems that the times of aggressive borrowing from abroad are over for Ukrainian banks.

Oleksandr Zholud, an economist at the International Centre for Policy Studies (ICPS), financed by George Soros’ Open Society Institute, said that “Ukrainian banks were unable to tap world capital markets this year due to the continuing jitters of financial market after the US sub­prime crisis,” adding that in 2008 interest rates for loans to Ukrainian banks will be higher than in 2007.

Vasyl Yurchyshyn, director of economic programs at Razumkov Center for Political and Economic Studies, said that some of the Ukraine’s banks will have trouble refinancing past loans and raising fresh cash this year.

“Many banks take short­term loans from international lenders,” he said, adding that this year many loans will have to be refinanced. “Conditions of borrowing on Western markets and the economic situation in Ukraine are such that by far not all (lenders) are eager to continue refinancing [Ukrainian banks].”

Yet, according to Yurchyshyn, there is no need to panic, and no imminent “credit crisis.” Banks will simply be forced to borrow at higher rates, and will pass much of the added costs onto customers taking out loans, he added.

The credit squeeze will be softened by the presence of international banking groups, who have snapped up some of Ukraine’s top 20 banks in recent years. Their financial muscle will ensure that the leading banks in the country stay afloat, and continue to offer clients competitive services.

Boyarchuk warned that many Ukrainian banks, foremost the smaller ones, would be forced to make lending even more expensive, as banks seek to ensure their rates of return.

“Basically, under the conditions of 30 percent inflation, banks need to somehow compensate their costs for borrowing money,” he added.

Boyarchuk noted that Ukrainian bankers are not eager to reveal how difficult, or expensive, it’s gotten for them to raise financing from foreign lenders.

Now the life line has been cut, interest rates have risen, and could, some economists say, help cool down what they see as a potentially overheating economy. Boyarchuk said the trend could stabilize economic growth acting as a deterrent to many citizens that have overspent in recent years. It could also bring about a correction in bank management, ending years of risky loans.

Peter Baron, CEO of Ukraine’s VAB Bank, said this chain reaction has restricted money supply, lending has already tightened up and gotten more expensive.

Some banks significantly increased their interest rates for lending operations and “even stop lending in order to stop the outflow of capital resources.”

Source: http://kyivpost.com/