BSTDB President Dmytro Pankin: The Bank plans to create more new projects with further involvement of external parties to participate in financing
Exclusive interview of the President of the Black Sea Trade and Development Bank (BSTDB) Dmytro Pankin to the Interfax-Ukraine agency
What are the macroeconomic forecasts of BSTDB for the Black Sea region for 2021-2022? How have they changed in recent months and how will it affect the bank's activities and projects in the member states?
Unlike previous crises, solid pre-existing macroeconomic situations in our member countries permitted them to pursue expansionary fiscal and monetary policies to combat the pandemic induced economic downturn. Those unprecedented policy actions prevented far worse outcomes - central banks provided liquidity and supported extension of credit; governments provided fiscal support in form of direct transfers, wage subsidies, liquidity support, unemployment insurance; financial regulators showed forebearance and allowed exceptional deviation from rules and standards. As a result, the downturn in 2020 in the Black Sea region was less bad than feared and compares well to the world economy and other regions. For example, against expectations of a 5.6% GDP contraction just six months ago, the actual contraction in our region came in at less than 2.5%. This also means that forecasts for 2021 should factor in a higher base compared to previous forecasts. So, current forecasts for 2021 might be lower than previously. However, those forecasts are based on the better than expected performance in 2020 and, thereby, rely on a better and more solid base.
Better, solid, and ready to grow conditions might require more financing in the next few years. As such, our bank is ready to provide the necessary support to projects that can further improve regional cooperation and economic development. During the pandemic, investment everywhere slowed down, and BSTDB deferred projects in the infrastructure sector or for corporates looking to expand. Instead, Bank financing shifted more to health sector activities and especially support to SMEs, which found themselves facing difficulties in obtaining financing, particularly at the beginning of the pandemic. As ‘normalcy’ returns, we expect investment in expansion and growth to pick up again, and for our portfolio to adapt accordingly.
What are the main consequences of the pandemic for the economic development of the region? How do you assess the state of their overcoming?
This is still an ongoing process. Countries, companies, and people are better positioned to weather pandemic shocks with selective and less costly economic measures compared to the situation in the early stages of the pandemic. However, the virus is still around, people are still getting sick and dying. So, it is not over yet. The past experience, following the crisis of 2008-2009, shows us that countries in our region do take lessons from the crises and then address shortcomings to prevent similar challenges. This was reflected in the well stocked fiscal and monetary buffers and the development of external resilience in our member countries. We believe that our countries can and will take proper lessons from the current crisis too. This will probably mean primarily more investment in healthcare. Additionally, the crisis highlighted weaknesses of relying on a single sector, as tourism dependent countries suffered the most. The early stages of the crises highlighted problems of reliance on single supply chains. Diversification of trade routes, access to products on different markets, diversification of supply chains, etc. are the lessons from the crisis that might have medium to long term repercussions.
In addition, countries will need to tame fiscal deficits and address potential problems in the banking sector, which might have been camouflaged by the forebearance of regulators. Plus, any increase in global inflation and related increases in the interest rates may aggravate addressing challenges about fiscal deficits and affect access to affordable external financing.
However, we believe that our countries will make proper conclusions fast enough to avoid repetition of similar problems and return economies to growth. This will likely require further economic integration between the countries of the region and globally, be it trade routes, knowledge sharing, improving economies scales, or diminishing dependence on single suppliers. Those things will likely require more investment in infrastructure. In those endeavors, our Bank, which has underlined the importance of infrastructure financing as a priority even before the pandemic, stands ready to support our member countries.
When does the bank plan to approve a new strategy with the possibility of selling projects at the development stage? How will this affect member states, for example, in Ukraine? How many such projects can be put up for sale?
Our Board approved the Long Term Strategic Framework (LTSF) for 2021-2030 in late June. This is a vision statement and roadmap for BSTDB over the coming decade, outlining how the Bank would like to enhance its relevance for its member countries, and across the region, over the coming decade.
The focus of the LTSF is growth and meeting shareholders’ expectations. One element, by no means the only one but certainly a shift from previous ways of doing business, is doing more generation of new projects and then bringing in external parties to participate in the financing. This may take the form of co-financing at the time of development, or it may take some other form which may involve selling a stake in the project, selling risk participation, or even potentially selling approved projects, either as sale of a loan or as part of a syndication. How exactly these will play out depends on a number of factors, including investor risk appetites and the ability of development banks to prepare operations in a standardized manner that facilitates sale, or even securitization, of assets. These developments are still at a nascent stage, but BSTDB is exploring them, as are other development banks, for the simple reason that shareholders on the one hand expect development banks to increase lending activities and help to fulfill the UN’s Sustainable Development Goals, yet on the other hand countries lack the fiscal space to carry out capital increases of development banks, to the degree that would be required. Hence there is a search for alternatives, and if such an asset class emerges and takes off, it will be possible for development banks to do more for the same levels of capital. Thus, expanding and deepening the pool of investors in emerging markets would be one benefit, and the other would be the ability of development banks to undertake more projects in their countries of activity, including Ukraine. But it should be noted that there are numerous technical and legal issues that still need ironing out, and there is not yet a deep enough investor class with the necessary familiarity and comfort level to consider purchasing development bank projects. Thus it is impossible to say what volume of projects will be put up for sale, other than that our Bank will pursue it and will do so to the maximum degree that is prudential and feasible.
"Green energy". Ukraine still violates the terms of the memorandum concluded with investors in the "green energy" memorandum. How does this affect the bank's projects? What other "green" areas in Ukraine the BSTDB is ready to invest?
First of all, let us say a few words about situation in the Ukrainian "green" energy sector. Together with other creditors and financiers, the BSTDB insists that the government adhere to the key provisions of the Memorandum agreed between the government and green energy producers. We expect the government to adjust electricity transmission tariffs to reduce the deficit of the state-owned Guaranteed Buyer, which is obliged to buy electricity from green energy producers and sell it on the market.
We are also very much concerned with the recent proposals of Ukrainian Parliament regarding the introduction of excise taxes on “green energy”. In particular, the draft law provides the introduction of an excise tax of 3.2% on the sale of electricity produced from renewable energy sources (RES). The introduction of the excise tax is a ‘de facto’ reduction of the feed-in-tariff by an additional 3.2% for existing stations, as this tax will be paid by RES electricity producers. We hope that while considering these initiatives, the Cabinet of Ministers and the Verkhovna Rada of Ukraine will weigh all the risks of such decisions for the image of Ukraine as a stable partner and investment-attractive country. We also expect the Ukrainian Government to resolve the issue of the Green Bonds to be able to cover past debts to renewable energy producers.
Regarding the impact on the Bank’s projects, we can represent that to date all clients have been servicing their debt fully and on time. Regarding other green areas in Ukraine, we are exploring the possibilities of financing projects where the electricity purchase is “guaranteed” by major industrial entities (i.e. Corporate PPAs) at the price levels somewhat close to the market prices.
In 2021, BSTDB has not yet announced any projects in Ukraine. When and how many Ukrainian projects may appear this year, in what directions? What is the future of the project announced in 2020 with the Galnaftogaz?
In 2021, the Bank coordinated and concluded a number of operations in Ukraine: a USD 15 million loan to Interpipe to support the company on debt capital markets and upgrade its production facilities, a USD 20 million loan to Araks for energy efficiency upgrades, and a USD 23 million loan to Epicentr for improvements in agricultural infrastructure. In addition, we revolved our USD 5 million Trade Finance Facility with Creditwest Bank.
Furthermore, we have a number of projects in our Ukraine pipeline in various sectors, including road infrastructure, agribusiness, commercial real estate, financial institutions for a total of over USD 155 million.
Regarding the Galnaftogaz, the Bank has a long-standing successful cooperation with the company. Unfortunately, we could not reach an agreement on the pricing of the latest operation announced last year. The Bank stays ready to consider other mutually beneficial cooperation opportunities with the company in the future.
A large-scale work and financing program "Great Construction" continues in Ukraine. How interesting is it for BSTDB? What projects can the bank be involved in?
BSTDB is exploring the existing opportunities related to this program. In particular, road and bridge construction projects are of our primary interest.
What is the prospect of BSTDB financing in national currencies?
We are developing Local currency (LCY) funding and placing of notes in local currencies in our member countries to provide local currency loans to businesses in those countries. BSTDB was the first multilateral development bank to offer LCY placement in Azerbaijan and Armenia, with the local currency portfolio also having placements in Georgia.
As it comes to Ukraine, at the moment the market situation does not allow us to raise the local currency through a local bond issue at a cost that would enable us to offer attractive pricing to Ukrainian borrowers.
Ukraine hoped last year to host the Board of Governors of the BSTDB and hold a business forum in Odessa. Unfortunately, this event was postponed twice. Does the bank plan to hold it in Odessa in 2021, because now the epidemiological situation has improved?
The Business Forum - the Bank’s flagship event is organized annually under the auspices of the Government of the country chairing the Board of Governors. Ukraine held a successful chairmanship that was concluded with the organization of a business webinar in December last year in close cooperation wth the Government and Ukrainian business community. The webinar was opened by Ihor Petrashko, Minister for the Development of Economy, Trade and Agriculture of Ukraine, who was the BSTDB Governor for Ukraine and Chairman of the Bank’s Board of Governors. The event targeted medium to large-sized Ukrainian companies and addressed their needs in post-pandemic recovery.
The organization of business events in our member countries remains our priority and I am sure we will have the chance to host a physical event in Ukraine as soon as the pandemic restrictions are fully lifted and the situation will stabilize.