The Interest Rate in Ukraine Pays Close Attention to Economic Indicators

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In 2014, Ukraine underwent a revolution ousting a Russian puppet-president which sent the country into complete chaos both economically and politically. Following the revolution Russia annexed Crimea and full-on warfare broke out on the eastern border of Ukraine killing thousands of people. The economy shrank dramatically, prices went up, and given the unstable state of the economy, investments stopped flowing into the country. The interest rates set by the National Bank of Ukraine skyrocketed immediately. This interest rate is what’s called the federal funds rate in the United States. It is the interest rate set by the central bank that tells commercial banks how much interest they should charge when making loans to each other. What can the interest rate tell us about the economy and why should you as a citizen of Ukraine or foreign investor care about it? The answer is simple: what banks charge each other sets the interest rate at which they pay or charge you! The central bank’s interest rate is one of the most important factors that sheds light on the economic indicators reflecting the current and expected economic health of a country.

Take a look at this chart:

Image from tradingeconomics.com

This chart shows the interest rate set by the National Bank of Ukraine in a 10-year period. There are a couple of conclusions we can make from observing the chart. The most noticeable one is that Ukraine’s economy is incredibly unstable. That is true and, in fact, the prime reason for a spike in interest rate starting in 2014 is high inflation.

Now, take a look at the following inflation chart:

At its highest peak, inflation reached more than 60%. In order to offset the increasing inflation, the National Bank of Ukraine set its interest rate at 30% during the same time period. Since then the rate has gradually subsided to 16.5% and inflation went down to 8.8% as of this writing. As soon as the economic indicators started showing signs of recovery: inflation decreased, and GDP increased from $91 billion in 2015 to $130 billion in 2019 it made sense to lower the interest rate. However, the interest rates are still high, especially compared to those of the U.S. which recently lowered its federal funds rate to a target rate of 1.75% – 2%. The underlining explanation might not be obvious but part of the reason for keeping interest rates high is to lure foreign investments to finance the government’s debt and to rebuild Ukraine’s economy amidst the war and political pressure. Here’s what Ukraine’s short-term government bond yield looks like:

Image from www.worldgovernmentbonds.com
Data as of September 23rd, 2019

These percentages are unbelievably high. According to CNBC, the investors’: “holdings of domestic bonds have jumped nearly 10-fold since the start of the year, to 61.6 billion hryvnias ($2.4 billion).” If you are an investor searching for a high yield investment this is the time and place to invest.

Unfortunately, the Ukrainian side of the interest rate story isn’t nearly covered as extensively as the story of the Fed’s rate cut. Nonetheless, it is still worth examining the economic indicators and search for possible connections to the interest rates.

Sources:

https://tradingeconomics.com/ukraine/interest-rate

https://tradingeconomics.com/ukraine/gdp

https://tradingeconomics.com/ukraine/inflation-cpi

https://www.cnbc.com/2019/07/08/reuters-america-poll-analysts-split-on-ukraine-interest-rate-decision-in-july.html

http://www.worldgovernmentbonds.com/country/ukraine/

Student Debt Scares!

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For those who earn more household income than qualified for Pell Grants but also make below the necessary means to bear the brunt of a costly higher education price tag, student loans are an attractive opportunity to finance an education. Christopher Ingraham for the Washington Post reported that American families carry more than $1.6 trillion in student debt or nearly 8 percent of national income. The number is striking, and it’s not going away any time soon. Since the 2000s, this figure has doubled, the Washington Post said.

With the pressure to earn a degree and an attractive promise of future opportunities, many bite the bullet and take out student loans. According to The Balance, the average U.S. graduate was straddled with over $39,400 in student debt in 2017. Some public service jobs and companies offer loan forgiveness opportunities for their employees, promising to pay off their worker’s college loans. Additionally, presidential candidates such as Bernie Sanders have expressed their plans to cancel student debt or make the cost of higher education free, making an attractive promise to those who understand the crippling weight of debt.

What are the implications of this financial burden? People are delaying marriage, investing less in small businesses, choosing not to buy homes and putting their income straight to paying off debt instead of saving for retirement, Ingraham said. And because of this, people aren’t spending as much money on goods and services. The Balance reported that individuals are less likely to seek out types of credit (like using credit cards or taking out car loans) because they are reluctant to borrow more money. As a result, lenders and banks receive less interest fees and slow spending affects businesses. 

The real question, then, is if a college education is worth saddling piles of post-grad debt. CNBC referenced Twitter trends in which users encouraged other students to drop out of college because they claimed the student debt wasn’t worth it. 

Unfortunately, there is no clear answer because traditionally, a college degree is synonymous with upward mobility and higher earning potential. It’s almost universally acknowledged, in America at least, that to be competitive in the job market, having a bachelor’s degree is the baseline expectancy. 

Thirty-six percent of college graduates say their degree wasn’t worth it, according to CNBC, but experts say it’s still valuable. If basic economics centers around supply and demand, the demand for a college degree is higher than ever before, driving up the price of attaining one. Still, the solutions are bleak. The CNBC article says to avoid too much student debt, choose a more affordable college (advice that offers little solutions, in my humble opinion), and an author quoted in the piece says, “Don’t buy the typical advice that everyone seems to be throwing around these days saying college loans are the worst thing on earth. They’re not.” Still, delaying a family and withholding home-ownership sounds pretty rough to me. In the end, like most things, opportunities are a pay-to-play game and college is no exception with broader economic implications.

Saudi Arabia Aramco Attack

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On Sept. 14, a major oil field, Khurais, and another major refinery, Abqaiq, owned by Saudi Arabia’s Aramco were attacked by drone missiles. Geo-politics aside, this led to an unprecedented, major disruption of 5 percent of the world’s energy supply. These two locations account for half of the kingdom’s total output. This equates to 5.7 millions barrels per day.

The price of oil on Sept. 13 was $54.85 dollars per barrel.

Here, the price of oil skyrocketed to $62.90 per barrel just after the attacks. A natural reaction to a sudden shock in a major source of the world’s energy supply.

The price of oil today has lowered to $57.29 per barrel. That is due to government reactions towards the attack which calmed the marketplace.

Saudi-Kuwait joint oil operations announced that they would return to full production very soon. Matter of fact, half of the disrupted output has been restored as Tuesday Sept. 17. Saudi Energy Minister, Prince Abdulaziz bin Salman, said that Aramco will be operating at a full capacity by the end of September. Also, the Saudi official said that the country would use oil supplies on-hand to keep markets leveled.

President Trump also aided in the oil-supply crisis. He authorized the release of the US’ Strategic Petroleum Reserve; furthering the stabilization of crude oil prices. The reserve is located in salt caverns beneath Louisiana and Texas and is the largest of its kind.

The Strategic Petroleum Reserve was established in 1975 by President Gerald Ford as a result of the Arab embargo of the time. This was part of the Energy Policy and Conservation act. The purpose of the Strategic Petroleum Reserve is to keep at least 90 days worth of oil in case crises (such as the embargo and current attacks) were to arise and cause a disruption.