Advisory support for strengthening financial markets in wartime

THE BACKGROUND

Following measures adopted in the aftermath of the 2014-2015 crisis, the Ukrainian financial system met the Russian invasion of Ukraine in February 2022 war in relatively strong condition.

However, it faces heightened operational, liquidity, and solvency risks, while businesses suffer from the direct impact and economic spillovers of the war as well as further exacerbated the problem of accessing finance. Damages caused by the war resulting in loss of collateral and potential further loss of assets in occupied regions and loss of revenues impacting borrowers' repayment capacity will affect banks' asset quality and, ultimately, solvency. As a result, banks are reluctant to provide new credit, and the role of credit enhancement instruments becomes critical with Government actively searching for various ways to support and revive economic activity in liberated or Government controlled areas.

One of the best ways to develop Ukraine's export potential is to strengthen the environment for private investment and productivity growth by undertaking key structural reforms. This includes improving the efficiency of credit allocation and gradually reducing the footprint of the Government in the public sector after the end of the martial law.

THE PROJECT

Thierry Senechal, FINANCE FOR IMPACT Director, has been hired by the World Bank to provide technical assistance to Ukrainian Authorities (Ministry of Economy of Ukraine, and its Deputy Minister Taras Kachka) on financial reforms aimed at improving access to finance for the economy in a period of war, including the setup of an Export Credit Agency.

THE RESULTS

The assignment consisted in advising the Government on how to create an enabling environment where access to finance and risk management provides a foundation to crowd-in private sector investment.

In addition, specific advisory support was provided to strengthen the Export Credit Agency (ECA). FINANCE FOR IMPACT had already provided advisory support in 2016-2018 to create the ECA in Ukraine. This ECA was launched in 2020, and further advisory support was needed to grow the ECA capital structure, set up the governance and design a more comprehensive product offering. This ECA was seen an essential instrument for strengthening the local capital market and accelerating equitable growth during and after the war.

Specific tasks were performed:

• Take stock of the recent legal amendments, regulations, and operational developments regarding ECA
• Provide technical assistance to the Ministry of Economy, Development and Trade on the best international practices to further improve the mandate and scope of work for the ECA
• Provide guidance on best international practices for the corporate governance arrangements for ECA
• Analyze internal procedures, operations, and products currently offered by ECA and develop recommendations for improvements in line with best international practices
• Analyze the mandate of state banks involved in providing trade financing and export crediting in terms of possible overlaps with the mandate of ECA. Prepare recommendations to avoid any such overlap
• Analyze and help NBU and Ministry of Economy, Development and Trade develop internal bylaws and regulations related to ECA as well as ECA's own internal procedures and bylaws
• Analyze current regulatory/supervision arrangement for ECA and share best international practices
• Analyze any other regulatory/legislative obstacles to launching ECA with a proper mandate
• Update the analysis on access to fiancé for exporting SMEs and identify key market failures and export financing constraints, including those resulting from the war, and propose solutions where ECA interventions are most critical
• Provide other technical assistance as requested by the Ministry of Economy, Development and Trade, ECA, or World Bank in relation to improving the efficiency of ECA.