Ukrainian foreign exchange market prospects until end of 2018 period

Author : Bohdan Danylyshyn

The hryvnia exchange rate fluctuations that we are seeing this year are not as great as it happens with the currencies of many developing countries. And if we manage to get a tranche of the IMF loan, avoid expansion of government spending in December, and also in the absence of shocks in the global financial and energy markets, we can enter next year with a stable situation at the exchange market
20:30, 22 October 2018

Open source

If you consider the previous 12 months, you can see several periods of pronounced dynamics of hryvnia to the dollar exchange rate. The first one began in November 2017 and lasted until mid-January 2018, when the official rate dropped from UAH 26.5 to UAH 28.8 per dollar (a drop of 8.7%). Since the last decade of January, there has been a prolonged strengthening of the national currency, which lasted five months - until June 25. Its rate strengthened to 26.2 UAH per dollar (an increase of 9%). After that, within two weeks, the hryvnia rate first dropped to 26.42 (July 2), and then returned to UAH 26.2 per dollar (July 9). Since July 10, the national currency has steadily weakened against the dollar, twice - on August 27 and September 24 - having reached local minimums at the level of 28.3 UAH per dollar. From the end of September, the downward trend was broken, the national currency strengthened - to UAH 27.9 per dollar as of October 16.

Depreciation at the beginning of the year is not seen the first time. It is explained by the insufficient coordination of fiscal and monetary policy: at the end of the year, the government, as a rule, spends money very actively. For example, in December 2017, the balance of the Cabinet of Ministers in a single treasury account decreased 10.6 times - from 54.1 billion to 5.1 billion UAH. The National Bank also worked imperfectly, in the second half of 2017 it was late with the increase in the discount rate: the prerequisites for tightening monetary policy were formed in August-September last year, and the rate increase cycle began in mid-October.

The devaluation of the hryvnia, which we observed in July-August of this year, was typical (as a rule, the hryvnia depreciation occurred in September and part of October). There are several reasons for this. External cause - the FED rate cycle has led to an increase in the attractiveness of assets in US dollars, which has risen significantly in relation to the currencies of countries with emerging markets. But the hryvnia depreciation rate was significantly lower than the devaluation of the Argentine peso, the Brazilian real, the Turkish lira, the Russian ruble and the currencies of many other emerging market countries. There are two internal reasons. First, it seems that domestic importers, who, as a rule, intensify their activities after the end of the summer vacation period, decided to “take the lead”: in July and August, the demand for currency in the cashless market was significantly higher than in the previous years. This is evidenced by indicators of foreign trade: the volume of imports in July 2018 was 25.3% more than in July last year, in August of this year - higher by 17.4% than in August 2017. Accordingly, there was a higher demand for foreign currency. Secondly, the hryvnia volume, which entered the market as a result of redemption of short-term government bonds, which the government was forced to issue at the beginning of the year due to the difficult state budget situation for January-February. Since we have a floating exchange rate regime, the National Bank smoothed out sharp fluctuations in the exchange rate, but could not stop the emerging trend.

By the way, if we compare the hryvnia and the dollar at the beginning of the year and October 16, it turns out that during this time the hryvnia has strengthened (albeit slightly by 0.5%). What to expect from our currency to the end of this year? Among the factors that influence the hryvnia exchange rate, I will highlight the important ones: prices for major export goods (agricultural products, mineral fertilizers and ferrous metallurgy products), prices for major imported products (energy and consumer goods for the population), prospects for the next tranche of the IMF loan and payments on public debt.

Prices of major export goods. Consider the Commodity Metals Price after a moderately positive trend in April-July. In August-September, this index declined, but in October it stabilized at 77.5. Taking into account the seasonality of demand for steel products, I do not think that the decline in prices for it will continue; rather, we should expect a moderate growth. If this happens, the supply of currency in the interbank market may increase. The situation with the prices of mineral fertilizers is neutral. If we consider the Potassium Chloride Monthly Price, we can see amazing stability: the price of a metric ton of mineral fertilizers is at the level of $ 215.5, not changing since September 2017. Look at the prices of agricultural products. According to the Food and Agriculture Organization of the United Nations, after a rise in the price of wheat in July-August, there was some decrease in it in September - by 3% (however, world prices for wheat in September of this year were 12% higher compared to prices of September 2017) . The reason for the decline in prices last month was the activation of the largest exporters at the beginning of the next marketing year. Logic dictates that prices will stabilize in October-November. And, judging by the harvest of this year, wheat exports from Ukraine will be consistently high, which should have a positive impact on the currency supply. With respect to corn prices, a slight decline is expected, but for the foreign exchange market this will be offset by the high volume of its exports. Let’s consider one of the most important export trading positions for our country - sunflower oil. Its prices have been declining for a long time, however, export volumes give us hope for serious volumes of foreign exchange earnings (Ukraine occupies 55% of the world market for raw sunflower oil, the industry’s potential is increasing the production of refined products).

Now about prices for the main imported products. Since the beginning of the year, world oil prices have been at a relatively high level, fluctuating around $ 80 per barrel. Since the time lag between changes in world oil prices and retail prices for fuel in Ukraine is rather short (1-2 months), this oil price has already been taken into account in price tags at Ukrainian gas stations, and the rise in gasoline prices in August-September was associated with a weakening of the hryvnia .

The average price of imported gas this year was (in USD per thousand cubic meters):

January - 279.4

February - 261.1

March - 278.7

April - 310.8

May - 263.5

June - 267.4

July - 309.1

However, if we look at the gas price chart that formed at the end of September - the first half of October at European hubs closest to Ukraine (the Dutch TTF and the German NCG and GASPOOL), there is a noticeable tendency for quotations to fall (over the past two weeks, prices fell by an average of 13%) . The volume of gas pumped by Ukraine into underground storage at the end of September amounted to 16 billion cubic meters. Therefore, the active purchase period is close to completion, there is enough gas to ensure transit and the heating season (it will be bought on a large scale only in the event of unpleasant weather surprises). That is, the situation is regular, it should not have a serious pressure on the foreign exchange market.

Regarding coal imports, the situation is relatively favorable: since the beginning of the year, the average prices of thermal coal decreased from $ 77 to $ 68 per ton. Probably, as the winter approaches, coal will rise in price, but it is unlikely that prices will exceed last year’s ones.

The population’s demand for imported goods is growing, as evidenced by consumer lending statistics. So, its volume for 8 months of this year increased by 20.5% (unfortunately, the lion's share of funds goes to the purchase of foreign goods, so the problem of developing and implementing import substitution programs is acute). On the general scale of imports, the influence of this factor on the future exchange rate dynamics is not so large. However, by the end of the year, as a rule, imports of consumer goods increase sharply, which may have a situational effect on the hryvnia exchange rate.

According to the Ministry of Finance, payments on foreign debt in the fourth quarter should reach UAH 17.25 billion, or about $ 616 million (of which $ 429 million is the repayment of IMF loans). This factor, along with the uncertainty about the receipt of the next tranche of the IMF loan, is the most alarming. I hope that in case of complications, the Ministry of Finance will be able to organize the attraction of debt financing (preferably with a lower yield than it was in August). I hope even more for success in negotiations with the Fund, at least the National Bank is doing everything necessary for this. Continuing receiving loans from the IMF is also important because we will receive macro-financial assistance from the European Union this year.

Now let’s sum up. The first is that the hryvnia exchange rate fluctuations that we are seeing this year are not as great as it happens with the currencies of many developing countries. Secondly, I think that the seasonal weakening of the hryvnia in 2018 shifted from the typical period “September-October” to “July-September”, and its potential is probably exhausted. Third, I believe that the effect of factors that can positively and negatively affect the hryvnia exchange rate by the end of this year, in general, will be mutually compensated. And if we manage to get a tranche of the IMF loan, avoid expansion of government spending in December, and also in the absence of shocks in the global financial and energy markets, we can enter next year with a stable situation at the exchange market.

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