Exchange rate fluctuations after change of power in Ukraine

Author : Natalia Lebed

Source : 112 Ukraine

Economic downfall or strength depends on the “peaceful” or “non-peaceful” completion of presidential elections in Ukraine
14:00, 12 April 2019


Since Ukraine gained independence, traditionally, any political upheavals have entailed an economic “downfall.” The society fears a sharp change in the exchange rate, since such a change, as a rule, costs a pretty penny. What will happen to the dollar exchange rate if Zelensky comes tomorrow – this is one of the most discussed questions today.

Oleksandr Okhrimenko, head of the Ukrainian Analytical Agency, states that “there would be no devaluation, perhaps, there might be even a revaluation.” But he adds: “If a new Maidan happens, the course would immediately “soar.” Here, the economy might stop working, and people would begin to panic. The other experts agree with Okhrimenko.

Related: Ukraine's economy after elections: Why everything will be fine

There are two options for the pace of the developments. These options are not called “Poroshenko-A” or “Zelensky-B,” but rather it is about “peaceful” or “non-peaceful” completion of elections. In the case of post-election excesses, everything will be pretty bad (including, for the national currency). But if the presidential epic ends calmly, the name of the winner will not play a big role.

Pavlo Melnyk from MPP Consulting agency has a slightly different point of view. He believes that big politics would have influenced the dollar, “if we had an imbalance at inflation parity would be 20-25 percent.” Melnyk explains: inflation is 10% in Ukraine, and in the United States it is 2%, then the inflation parity corresponds to 8%. At the same time imagine, he says, that the hryvnia exchange rate is artificially kept at a certain level, although the national currency rate would already have had to fall. “Today, the inflation parity imbalance is somewhere up to 5%. In general, it is uncritical, the main thing is not to increase it,” Melnyk adds. He concludes that as of now there is no reason to worry – the first round of elections had no effect on the hryvnia exchange rate, therefore, obviously, this tendency would continue.

Economic analyst Oleksiy Kushch says that Zelensky’s victory might provoke a so-called “desertion of elites,” as it happened in 2014. Now, this process will be “less obvious.” “However, if the authorities fail to reach some kind of hidden consensus with the forces that can come to power, then, naturally, the elites and the business connected with them will start withdrawing capital. The outflow can reach several billion dollars,” the expert says.

Related: Possible election of Zelensky not to influence economy quickly, - Moody’s

Ukraine’s ex-Minister of Economics Bohdan Danylyshyn notes that “in the first two months of last year, foreign investors more than doubled their investments in Ukrainian government securities (by 223 million USD). And in January-February 2019, non-residents increased their investments in government bonds 3.2 times (at 484, million USD). As we see, political risks did not frighten foreign financial figures. According to Danylyshyn, over the next 3-6 months, the hryvnia will remain stable, and perhaps even strengthen.

“For such commodity economies like ours, everything is simple: if world prices for export goods are high, then it doesn’t matter who our president is, everything will work, and we’ll get our 2% GDP growth,” Kusch states. Now “raw scissors” work in our favor. But in the autumn, the situation might change: the decline in demand for the metal is projected due to the slowdown in China’s economy and the cheapening of grain as a result of its global overproduction. Against the backdrop of such a crisis, which may occur before the end of the year, Ukraine has an additional problem, namely that we lack 4 billion USD to pay off external and internal debts. However, Ukraine uses IMF tranches to service its external debt. So far, the IMF will not make any statements, and therefore there are no reasons for disrupting the loan cooperation program. Of course, some risks still exist, but they are hard to calculate.

Related: Elimination of damage from barbaric approach to Ukraine's economy will take at least 10 years

But our macroeconomic stability, the growth of the economy, which has actually lasted already for three years, our exchange rate stability are based on the cooperation with the IMF. If we remove the IMF from this equation, we will very quickly feel the pressure on the national currency.

During these spring events, we forget that in the fall Ukraine will receive a new government and a new prime minister. And although the emphasis in our republic – despite the return of the 2004 Constitution – has been shifted to the figure of the president, the head of the Cabinet of Ministers also has considerable weight. In any case, it is he and the economic “wing” of the Ukrainian government who would have to negotiate with the IMF.

Related: Ukraine's presidential elections: expenses for second round estimated at $462,838

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