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Satisfy exporters or support people: What would Ukraine’s Cabinet do with hryvnia rate

Author : Olexandr Honcharov

14:22, 19 April 2017
Satisfy exporters or support people: What would Ukraine’s Cabinet do with hryvnia rate

Author : Olexandr Honcharov

There is no such hryvnia quote that would suit all market participants. Therefore, the Cabinet and the National Bank should skillfully maintain a balance of interests in a free exchange rate

14:22, 19 April 2017

Read the original text at 112.ua.

gazprom.ru

What hryvnia exchange rate Ukrainian economy needs? From the position of exporters, of course, it should be low, that is, for those who produce products in our country. Thus, their costs are fixed in UAH, and revenue comes in dollars or euros. But for the Ukrainian consumer it is better when the hryvnia strengthens, as imported goods become more affordable. Expensive hryvnia has another strong side - it is a significant contribution to the slowdown in inflation. And, of course, a strong hryvnia adds confidence to our small and medium-sized business in attracting investments, contributes to the low cost of a credit resource and extends the horizons of business planning.

However, strengthening of the hryvnia creates tension for the Cabinet in the budgetary sphere, as hryvnia revenue of exporters decreases, which immediately affects the volume of tax revenues. Therefore, in the near future, exporters want to see hryvnia exchange rate at the level of 30-32, and probably then our economy will come to life. That is why the exchange rate is also the most important regulatory and component of economic growth. Consequently, there will always be a dilemma: to encourage exporters or to protect the domestic consumer? What will be more important at this stage for the Ukrainian economy: low inflation or controlled exchange rate?

Related: Fear and loathing: Why Ukrainian hryvnia depreciates

Of course, it is absolutely impossible to fulfill these two key tasks simultaneously. It is like trying to hold two watermelons with one hand. However, it is necessary to correctly prioritize this area. So, as the main priority of the NBU in the current conditions, according to a number of leading experts, should be a policy of achieving relatively low inflation, which would also help the development of small and medium-sized businesses. And the preservation of a weak hryvnia in free navigation will lead to an increase in the competitiveness of our exporters in world markets. However, we cannot allow the collapse of the hryvnia, as this would kill the recent process of modernization of individual Ukrainian productions.

Following the experience of the countries in successfully overcoming the crisis, we, of course, need to reduce the level of inflation and interest rates on loans. Prime Minister Groisman understands this, but, unfortunately, he does not know how to do it. After all, it requires developing competition, incl. the financial services market. We have many representatives of the financial and economic block of the Cabinet know how to do it, but stubbornly do not want. Moreover, the government itself provokes a rapid increase in inflation and energy prices.

Related: NBU: Hryvnia fell due to seasonal decline in business activity

For example, since March 1, the size of the increase in the price of electricity was 25%, which significantly exceeded the forecasted rate of inflation at 8.2% by the end of this year 2017. Accordingly, the increase in prices in the consumer market follows the rise in prices for energy resources, They are all pervasive. And today, for example, the seller in the market estimates the price forecast for its products so that it covers at least the cost price. He does not use the official inflation index, but looks at how the prices for light, heat, water, and gas actually increased, Their overstated growth rates immediately raise the overall inflationary background, in particular, for meat and milk.

Related: NBU declares Vector Bank insolvent

Therefore, we should not be surprised that, following a bank bust and a financial fire, an inflationary fire awaits us. It is necessary to tell fairly, that we are already in a step from a default. This, in fact, is not only my opinion. We will again have to recapitalize the banks. That is just a question of where to take money for this? I admit that the Cabinet, as in past years, will entrust this task to the National Bank. But this, as we already know, means an additional issue and an increase in inflation. In order not to step on the same rake, I would advise our financial authorities to shift the burden of recapitalization of Ukrainian banks to Asian sovereign funds from China, Singapore, and other countries in East and South-East Asia. After all, huge liquidity accumulated in Asia and the owners of this money are looking for where to invest them. In addition, according to the Financial Times, China's banking system has become the largest in the world.

How will this respond to us? We want it to be with the benefit for the hryvnia exchange rate and in general for the Ukrainian economy. Our national currency is still able to go through some increase in risks. So, last month it jumped from 27 to 28 hryvnia for one USD.

Related: Nothing new except of hryvnia's depreciation

Consequently, our national currency expects further weakening in the short term, we would see a downward movement, and foreign investors will see our government bonds less attractive. Such a scenario is likely already before the end of May this year. In this regard, I specifically looked at the dynamics of changes in the main risk indicators for March 2017, and they all show quite strong changes in the last two weeks. And only hryvnia "stands" in a very narrow corridor. I am sure it is a calm before the storm.

What is the mystery here? Well, frankly, there is no such hryvnia quote that would suit all market participants without exception. Therefore, the Cabinet and the National Bank should skillfully and professionally maintain a balance of interests in a free exchange rate. And as the US Treasury Secretary said several decades ago: "Dollars are our currency and your problems." It is difficult to argue with such a statement, moreover, it gives rise to many and urgent questions of today, the answers to which will be given in the near future. This future is very close, in a few weeks May comes and we would learn about the risks or new opportunities for hryvnia dynamics.

Related: Difficult days of Ukrainian hryvnia: Why dollar is more expensive again

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