Ukrainian market

As of February 24, 2022, Ukraine is facing a full-scale war of the highest intensity in Europe since World War II. The outbreak of war has determined Ukraine’s economic situation throughout 2022. The war covered the entire territory of Ukraine – either directly or indirectly in the form of airstrikes – just weeks after it began. According to estimates by the National Bank of Ukraine (NBU), Ukraine lost about a third of its GDP in 2022. According to various sources, material losses exceeded USD 100 billion. According to data from the Statistical Office of Ukraine, the average annual inflation rate in 2022 was 20.2%, with December alone reaching 26.6% y/y. According to fragmented data for the first half of 2022, retail trade turnover declined by 19.5% y/y. During the same period, construction output declined by 62.5% y/y, and industrial output contracted by 32.2% y/y. These statistics do not include occupied territories. One of the main challenges for Ukraine’s economy in the second half of 2022 was recurring energy shortages, which intensified at the end of the year with attacks on the country’s critical infrastructure. According to a survey by the European Business Association (EBA), about 40% of companies have reduced production volumes due to power outages. The agricultural sector struggled with the blockage of export capacity for key agricultural products during the year, but alternative transportation routes have improved its situation.

The labor market situation is also only partially known. According to NBU estimates, the unemployment rate (International Labor Organization definition) reached a range of 30-35% after the war broke out, remaining at that level until the end of the year. The NBU also estimates that nominal wages declined by about 12-13% in 2022. An additional factor complicating the landscape of the Ukrainian labor market is the migration wave triggered by the war. At the end of the first quarter of 2022, the wave of refugees fleeing war reached about 3.4 million people (data from UN HCR, i.e.. the UN Refugee Agency). Over the course of the year, the migratory wave began to weaken, with some Ukrainian citizens returning home (in connection with the announced general mobilization, among other things). UN HCR estimates the number of refugees registered in Europe at 7.97 million by the end of 2022.

In June 2022, the NBU raised interest rates sharply – the prime rate from 10% to 25%. The strong monetary tightening was aimed at protecting savings in the hryvnia (UAH), increasing the attractiveness of hryvnia-denominated assets on global markets, stabilizing inflation expectations and reducing pressure on the exchange rate. The exchange rate of the hryvnia is significantly supported by the NBU’s currency interventions, and foreign currencies come primarily from international aid, which in October 2022 has already exceeded USD 30 billion (calculated according to the declarations of states and international organizations). The official hryvnia exchange rate, set at 29.2549 hryvnia per US dollar on the day the war broke out, was revised on 21 July to 36.5686, bringing the deviation of the spot rate from the official rate down to 10-12% from 28.5% before the decision to devalue the hryvnia in July. This has eased pressure on the NBU’s foreign currency reserves.

Due to the severe recession, the fiscal deficit for January-November 2022 hit a record high (UAH 712 billion). It was attributable to revenue growing by 23.9% y/y (owing to external government assistance and support from international organizations; revenue growth excluding aid funds was 0.8% y/y after 11 months of 2022) and expenditures, which grew by 71.0% y/y in January-November 2022. The NBU estimates that the fiscal sector will end 2022 with a deficit of 25% of GDP.

According to data from the NBU, the number of banks which engaged in operations in Ukraine dropped to 67 in 2022 (compared with 71 in 2021). At the initiative of the NBU, in order to maintain the continuity of critical financial infrastructure, in December 2022, 14 systemically important banks (including KREDOBANK S.A.) established the backbone of a common banking network, i.e. a network of branches scattered across the country, which will provide services to customers in a coordinated manner, including in the event of a power outage.

Total assets in the Ukrainian banking system in 2022 increased to UAH 2.35 trillion (eop) from UAH 2.05 trillion (at the end of 2021). Equity declined to UAH 218.5 billion from UAH 255.5 billion during the period, and accounted for 9.3% of total assets as at the end of 2022, compared to 12.4% as at the end of December 2021. Ukraine’s banking sector remains well capitalized (the sector’s capital adequacy ratio at 19.68% vs. 18.01% at the end of 2021 and a minimum of 10%). The first half of 2022 saw a decline in the ratio, but it began to improve in the second half of the year.

The volume of loans at the end of 2022 decreased by UAH 38.8 billion compared to the balance at the end of 2021 and stood at UAH 1,040.7 billion. The sources of the decline were loans to households (UAH -33.4 billion), while loans to private non-financial enterprises increased by UAH 10.5 billion. The biggest drops on monthly basis in the volume of loans were observed in February (UAH -40.3 billion) and in December (UAH -37.3 billion).

The volume of deposits was at the end of 2022 higher by UAH 391.3 billion as compared to the end of 2021, reaching UAH 1940.9 billion. In this period, deposits of private enterprises went up by UAH 79.9 billion, and deposits of households increased by UAH 264.8 billion. The volume of currency deposits increased in 2022 by UAH 197.0 billion (to UAH 683.9 billion) and in national currency by UAH 192.9 billion (to UAH 1,210.0 billion). The loan to deposit ratio declined to 53.6% in December 2022 from 69.7% at the end of 2021.

ROA (1.18% in 2022 vs. 4.09% in 2021) and ROE (10.33% in 2022 vs. 35.08% in 2021) declined, with both dropping below zero during the year and returning to positive levels from July.