Economics / 14. Economic Theory

PhD student Venger T.A.

Taras Shevchenko National University of Kyiv

The Crowding Out Effect in Ukraine

It is known in economic theory that increase of government borrowing reduces private investments. This phenomenon is called “crowding out effect”. Originally crowding out effect was attributed to domestic public debt: its formation or increase boosts competition between a government and a private sector for available credit resources and that, in turn, increases an interest rate.

In case of Ukraine domestic savings are not the primary source of the fixed capital formation – the correlation between these variables is statistically insignificant. It may be explained by existence of the deep savings gap. For example, the credits-to-deposits ratio in Ukraine is estimated to be about 180% [3, P. 15]. Moreover, the largest share of domestic savings consists of short-term deposits that are unreliable source of capital investments. Thus domestic borrowings of the general government do not crowd out private investments in Ukraine in conventional way. But in a state of severe shortage of domestic savings national economy is highly dependent on the international capital market that, in turn, makes it more vulnerable to external shocks.

When in 2008 the international capital market liquidity reduced dramatically, lack of credit resources increased the interest rate that in turn reduced lending to the real economy. According to the National Bank of Ukraine the average interest rate on loans to non-financial corporations increased by 4.9% in 2008–2009 and the ratio of loans to the real economy decreased by more than 30 p.p. of GDP compared to 2007. On the contrary, commercial banks increased lending to the general government (from 10 million UAH in 2007 to 1.9 billion UAH in 2009). The share of government bonds in the security portfolio of the Ukrainian depository corporations doubled during the period 2007–2010. It was almost 80% in 2011 (Table 1).

Table 1. Government securities held by depository corporations

Source: [5, P. 115; 6, P. 132]

Moreover, a number of recent studies (E. Borensztein, K. Cowan and P. Valenzuela (2007); Ş. Ağca and O. Celasun (2009) among others) have shown that in emerging markets private investments may be crowded out by external borrowings as well. Increase of the public and publicly guaranteed external debt adversely effects capital formation by lowering the country ceilings and thus increasing sovereign risk premium for private borrowers. In other words «…public external debt raises the riskiness of lending to the private sector, thereby “crowding out” private access to external markets by increasing the cost or reducing the availability of credit» [1, Р. 4]. According to the National Institute of Strategic Studies, sovereign credit ratings of Ukraine declined recently mostly because of the profound disbalance of public finances and external debt servicing problems of the quasi-public corporations like National JSC “Naftogaz of Ukraine” [4].

The results of crowding out effect estimation for Ukraine are following (t statistics in parentheses):

fcprivate_log = -0.048 · edppg_gdp + 0.027 · edpng_gdp + 23.56

(-6.12) (7.5)

Adjusted R-squared = 0.87

DW = 1.48

t = 20

Where fcprivate_log – logarithm of the gross fixed capital formation by the private sector; edppg_gdp – public and publicly guaranteed external debt, % of GDP; edpng_gdp – private nonguaranteed external debt, % of GDP.

Increase of the external public and publicly guaranteed Ukrainian debt by 1 percentage point of GDP causes reduction in private capital investment by 5.3 basis points average. The same increase in the external private nonguaranteed debt leads to the average growth of the gross fixed capital formation by the private sector by 2.2 basis points.

References

1. Ağca Ş. How Does Public External Debt Affect Corporate Borrowing Costs In Emerging Markets? / Ş. Ağca, O. Celasun // IMF Working Paper, 2009. – No. 266. – 36 p.

2. Borensztein E. Sovereign Ceilings “Lite”? The Impact of Sovereign Ratings on Corporate Ratings in Emerging Market Economies / E. Borensztein, K. Cowan, P. Valenzuela // IMF Working Paper, 2007. – No 75. – 32 p.

3. Лютий І. Фінансово-економічна криза 2008–2010 рр.: деякі чинники та уроки / І. Лютий, О. Юрчук // Вісник НБУ. – січень 2011 р. – С. 10–16.

4. Нова архітектура бюджетної системи України: ризики та можливості для економічного зростання. – К. : НІСД, 2010. – 35 с.

5. Бюлетень Національного банку України [Електронне джерело] / Національний банк України. – №1/2009(190). – 177 с. – Режим доступу : http://www.bank.gov.ua/doccatalog/document?id=66416

6. Бюлетень Національного банку України [Електронне джерело] / Національний банк України. – №9/2012(234). – 195 с. – Режим доступу : http://www.bank.gov.ua/doccatalog/document?id=121759