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Fear and loathing: Why Ukrainian hryvnia depreciates

Author : Oleksandr Moyseyenko

12:25, 20 January 2017
Fear and loathing: Why Ukrainian hryvnia depreciates

Author : Oleksandr Moyseyenko

Future prospects of Ukraine’s national currency are causing serious concerns

12:25, 20 January 2017

Read the original text at eurointegrration.com.ua.

Open source

Why prospects of Ukraine’s hryvnia are causing serious concerns?

Traditionally, the beginning of the fiscal period in Ukraine is accompanied by exchange rate instability. Hryvnia depreciates again. A few days ago, some banks asked 29 hryvnia to buy a dollar, and 28 to sell it. On Wednesday a reverse trend began and the Ukrainian national currency began to play its positions. Cash market began to approach the interbank currency. Interbank closed at 27.5 UAH per USD.

Overall situation on the currency market is similar to the last year’s one, so in the coming months we should expect stabilization of the corridor 27-28 UAH per USD. But the prospects of the hryvnia cause serious concern.
The new year with a new course
Recent fluctuations in the currency market became a new cause for withering criticism of the NBU and the government. Ukrainian officials trying to teach the people not to pay much attention on the rates and its fluctuations is one of the most debated topics among the public, the business community, and the media. For society, the exchange rate became a "beacon" for assessing the economic situation in the country.

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While NBU allegedly declared that it is not responsible for the hryvnia, last week, the regulator repeatedly advocated not only verbal intervention, but repeatedly entered the market with the sale of foreign currency to smooth the excessive fluctuations. As a result, the course gradually began to stabilize. This situation resembles last year. Ministry of Finance at the end of the year filled market with excess liquidity, which then affected the foreign exchange market. Only in late 2016, the exportersgave got 16 billion USD refund, which influenced the currency market.

In addition, as explained Deputy Chairman of the NBU Oleg Churiy, the predominance of demand for foreign currency over its supply was due to the seasonal decline in business activity in the agricultural sector, which led to a reduction in income currency earnings from exports of food products. NBU interventions have partly calmed the market. The currency was close to the value proscribed in the budget 2017 - 27.2 UAH per USD.

Related: Peskov: US sanctions against Russia hurt world economy


In general, National Bank tries to explain almost every hryvnia devaluation with some situational and temporal factors. If you recall press release and the statements of representatives of the central bank in recent years, it appears that the hryvnia would depreciate without any fundamental reasons. When the hryvnia depreciated from 22 UAH per USD of last autumn, the reason for the NBU was situational factor - the local elections. Elections were held, but the course has not changed after it.

During the last jump, from 25 UAH per USD to 27 USD for dollars, the National Bank put the blame on the political instability. So the current rate, according to the regulator, has been formed under the influence of situational factors.

Related: Economy of Kremlin-controlled Crimea: Steady decline


National Bank says the rate determines the market, however the regulator in fact often contributes to the devaluation. It did not provide returning to the previous values, buying currency in the market. Thus, in 2016 net acquisition currency to gold reserves reached 1.5 billion dollars.
The refrigerator is empty
So the regulator has its own arguments: it is not responsible for the course, now the main thing is to control the inflation. This, in turn, causes dissatisfaction among the population and business, because the latter has almost no opportunity to hedge currency risks.

NBU also nods in the direction of the inflation. "Watch the fridge," not the currency course, as NBU head Valeria Hontaryeva advised in the spring. Indeed, one of the victories of the National Bank in 2016 was relatively low inflation. As the regulator intended, the inflation rate did not exceed 12%.

Moreover, according to Deputy NBU chairman Dmytro Sologub, the main driver of price growth in 2016 was the increase of utility tariffs.

Meanwhile, core inflation, which excludes raw food, fuel, goods and services, was at the level of 5.8%.

But the question is: how inflation in Ukraine reflects real consumer needs of the population? In other words, where is that person, whose consumer’s basket has risen by only 5.8% during 2016?

Related: How and why will Ukrainian economy grow in 2017?


Ordinary consumers do not believe inflation called by the regulator. Deposits in reliable banks really hardly cover inflation and devaluation of the hryvnia devaluation.
Difficult fate of the national currency
In 2017 the NBU has set a more ambitious goal - to keep inflation at 6.10%, which hardly provides significant devaluation of the hryvnia. But it will be difficult to stay in the hallway of 27-28 UAH per USD in 2017.

2016 was the first more or less peaceful year in terms of hostilities and in general geopolitical sense, the focus of interest and controversy active efforts of the great powers shifted to Syria. Thus, the favorable combination of external and internal factors provides some stabilization of financial markets, including its banking sector. At the same time 2017 year will be difficult for the currency.

Related: 2016 in review: Ukraine's main economic results

"NBU unfortunately failed primary goal - to accumulate enough resources to fend off at least some of the threats that may arise in 2017," said the expert of the Economic discussion club Eugene Oleynikov.
According to him, Ukraine is critically dependent on external financing, and any failure to provide it could lead to another collapse. As you know, in 2017, Ukraine expects some recovery of payments on external borrowings to more than $ 4 billion.

At the same time, there is a good chance that in 2017 Ukraine will get only one minor IMF tranche. "We manage to get the last tranche. Administration of Trump will minimize the IMF program," say some sources  close to the Presidential Administration.

However, government and parliament simply might do not want to implement painful and unpopular reforms. Meanwhile, the privatization process is completely defeated, the inflow of foreign investment remains very low. Against this background, favorable conditions in commodity markets might not help.

Related: Extending sanctions will knock down Russia’s economy, - MP


"The whole stability of the exchange rate, alas, was achieved only through administrative restraining the currency market. As long as it exists, we can speak only about survival but not about growth. We will always be on the margins of the civilized world without free movement of capital," states  Yuriy Tovstenko from IK Concorde Capital.

 

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