Why is the volume of deposits falling? The situation on the financial markets of Ukraine

Economics and financial markets. Condition at the end of the second year of the war

In Ukraine, at the end of January 2024, the volume of deposits in banks decreased.

The drop occurred for the first time since August 2022, that is, practically for the first time in a year and a half.

The overall drop in the volume of resident deposits in banks amounted to 2.1% or UAH 49.2 billion, to UAH 2.35 trillion.

What is significant is that the reduction in deposits was primarily due to a reduction in hryvnia deposits. At the same time, household deposits decreased in volume more than the deposits of entrepreneurs.

Thus, the amount of household deposits fell in January 2024 by 2.5%, or by UAH 27.5 billion. The population's hryvnia deposits decreased by UAH 18.8 billion, and foreign currency deposits by $200 thousand in equivalent.

Business deposits decreased by 1.7%, or by UAH 21.8 billion.

At the same time, the entire drop was accounted for by hryvnia deposits (minus 3.5% or UAH 32.5 billion), while foreign currency deposits even increased (by 3.2% or $310 million in equivalent).

In February, hryvnia deposits in the banking system continued to decline. In the first six days, a reduction of UAH 10 billion was recorded. If this continues, the overall reduction in hryvnia deposits in January-February will be minus UAH 100 billion.

The situation with the net outflow of bank deposits looks even more threatening, given that customers' bank accounts continue to be replenished by financing the fiscal deficit, and hryvnia cash in circulation continues to decline.

Thus, in January, State Treasury operations (financing the fiscal deficit) led to an increase in the liquidity of the banking system by UAH 32.3 billion.

Along with this, hryvnia cash in circulation in January 2024 decreased by UAH 12 billion.

However, as a result, customer transactions led to a net outflow of hryvnia deposits from the banking system by UAH 51.3 billion.

The main direction of the outflow of deposits is the purchase of cash foreign currency and payment for imports.

In January 2024, the net purchase of foreign cash foreign currency by the population amounted to a historically record $0.9 billion. The graph clearly shows that a slight decrease in public confidence in the hryvnia began to wane in October (after the introduction of a managed flexible exchange rate regime) and increased significantly from December (after emergence of uncertainty regarding external assistance).

Along with this, January imports of goods in 2024 turned out to be quite high - $5.1 billion, which exceeds the volumes of January 2023 by 1%. Despite the fact that in January last year, imports included significant volumes of generating equipment.

To attract hryvnia funds into the banking system, the NBU has been pursuing a policy of truly positive interest rates since June 2022. As part of this policy, the NBU spent in 2022-2023. UAH 132 billion of public funds to pay interest to banks on certificates of deposit.

However, as we see with increasing uncertainty regarding external assistance, such a policy does not produce results. Bank deposits are beginning to decline rapidly, despite truly positive rates.

According to our estimates, if the NBU had left rates unchanged (at the level of May 2022), its expenses on certificates of deposit would have amounted to only UAH 61 billion.

Among the reasons for the decrease in deposits in 2024 are the following:

Growing currency risks against the backdrop of uncertainty regarding external assistance.

The flexible exchange rate regime, introduced by the NBU since October, strengthens the formation of negative expectations of bank clients and encourages them to quickly convert hryvnia funds into foreign currency to protect against the risks of a possible “managed flexible devaluation.”

Seasonality. December's high comparison base is usually associated with the implementation of budget contracts. In January, however, receipts into customer accounts are lower due to traditionally high import costs for winter. This leads to a decrease in balances in business and household accounts.

Economy

Polish carriers continue blocking the western border of Ukraine. According to the Ministry of Renewal, those currently blocked for free movement of trucks are “Yagodin – Dorogusk”, “Ugrinov – Dolgobichuv”, “Ustylug – Zosin”, “Shegini – Medika”, “Rava-Russkaya – Grebenne” and “Krakovets – Korcheva”. The most critical situation is at the Yagodin-Dorogusk checkpoint, where the movement of freight transport has completely stopped. In general, about 3 thousand trucks are waiting on the road in Poland. According to Minister Kubrakov, in January the export of agricultural products occurred mainly through sea transportation and amounted to 6.7 million tons. But only 0.37 million tons of agricultural products transited through Poland, which is about 5% of the total volume. At the same time, up to 1 million tons of agricultural products per month were exported through Poland in 2022. Given the length of the negotiation process on unblocking checkpoints on the western border, Ukrainian exporters are considering alternative logistics routes. Thus, the national carrier PJSC Ukrainian Danube Shipping Company is preparing to launch barge container caravans to the Middle and Upper Danube. The shipping company offers delivery of containers to the Danube ports of Bulgaria, Serbia, Hungary, Slovakia, Austria, Germany and to the Romanian port of Constanta. In addition to transportation, the company provides storage and transshipment in Ukrainian ports, organization of transshipment at ports of unloading. The state-owned company has begun consultations with carriers to attract the required number of containers needed to form the first caravans.

Budget

According to the State Treasury, in January 2024, the total amount of cash expenditures of the general fund of the state budget amounted to UAH 150.2 billion. Given the continuation of the wartime regime, the lion's share of expenses was directed to social and military purposes. Thus, in the structure of expenses, UAH 75.9 billion is allocated to wages with accruals, or 50.5% of the total expenses spent in January 2024. In particular, UAH 57.4 billion was allocated for the maintenance of military personnel. UAH 9.3 billion or 6.2% of total expenses were allocated to pay for the use of goods and services, of which UAH 1.2 billion was allocated to support the Armed Forces of Ukraine (purchase of military equipment, weapons, ammunition, defense products, personal equipment protection, fuels and lubricants, food).

UAH 42 billion or 27.9% of total expenses were allocated for social security (payment of pensions, allowances, scholarships), of which UAH 21 billion was a transfer to the Pension Fund for financial support for the payment of pensions, UAH 11.4 billion was for payment by the Ministry of Social policies for the social protection of children and families, the protection of citizens in difficult life circumstances, to support low-income families; UAH 4.2 billion was transferred by the National Health Service of Ukraine for the implementation of the program of state guarantees of medical care for the population.

UAH 9.5 billion or 6.3% of total expenditures were allocated to service the public debt; for transfers to local budgets - UAH 11.8 billion or 7.9% of total expenses.

Negotiations on the third revision of the Extended Fund Facility program between Ukraine and the IMF, which began on February 17 in Warsaw, are important for maintaining the vital activity of the state. From Ukraine, representatives of the Ministry of Finance of Ukraine, the National Bank of Ukraine, as well as other government bodies responsible for policies in the field of economics, energy, the fight and prevention of corruption, and the rule of law take part in the meetings.

Currency market

The foreign exchange market continues to be dominated by demand for foreign currency, the deficit of which is being filled by interventions of the National Bank, which amounted to $322 million over the past week (since the beginning of the year - $3.2 billion).

Finance

Over the past week, within the framework of the State program “Affordable Loans 5-7-9%,” entrepreneurs received 339 preferential loans from banks totaling UAH 1.4 billion, including 234 loans worth UAH 0.7 billion from state banks. During the period of martial law in Ukraine, 46,579 available loans were issued for a total amount of UAH 187.2 billion (including public sector banks - 34,693 loans for UAH 95.1 billion), of which, as of February 19 of this year, 13, UAH 87 billion – for investment purposes, UAH 8.85 billion – as anti-crisis loans, UAH 3.72 billion – as refinancing of pre-obtained loans, UAH 36.48 billion – loans for agricultural producers, UAH 57.8 billion – for anti-war purposes .

According to the NBU Banking Sector Review (February 2024), it is the “Affordable Loans 5-7-9%” program that allows supporting hryvnia lending: the total volume of loans provided under this program increased by 2% in the fourth quarter of 2023 and by 34 % for 2023. During the year, the volume of loans increased the most in the trade and energy supply sectors, and in the fourth quarter – also in the logistics and food industry. At the same time, over the last quarter of 2023, the portfolio of agricultural loans decreased significantly. In addition, thanks to lending under the eOselya program, the volume of net mortgage loans increased by UAH 4.3 billion in the fourth quarter of 2023 and by UAH 8.9 billion in 2023: during the fourth quarter by 23.2%, or by UAH 3.5 billion; for 2023 – almost half, or UAH 6 billion.

In terms of bank funding, the growth of customer funds in bank accounts continued throughout 2023, and their share in bank liabilities remained at record levels - about 91%. But the share of NBU refinancing updated the 2006 minimum. The volume of hryvnia funds of individuals increased by 20.5% in 2023. The growth rate accelerated during the fourth quarter, noticeably in December due to the seasonal receipt of salaries and bonuses. The beginning of 2024 was marked by traditional seasonal outflows of funds from the accounts of individuals, but this does not pose a threat to the stability of bank funding.