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Record inflation and China crisis: Should Ukraine expect rapid growth of dollar rate?

Author : Anna Peshkova

Source : 112 Ukraine

There are forecasts about the rapid devaluation of the hryvnia: supposedly, by the end of the year, the dollar will cost more than 28 hryvnias, or even reach the psychological mark of 30 hryvnias
10:40, 6 October 2021

Open source

News about the default of the largest Chinese real estate developer and about the change in monetary policy of the US Federal Reserve System add fuel to the fire. All the more so against the background of a significant rise in prices, and for gas in particular.

Will the hryvnia really fail?

What threatens the hryvnia

It is impossible to believe the rate set in the budget: for 2021, for example, officials pledged the dollar at 29.1, and at the time of this writing, the dollar quotes are 26.6 on the interbank market. A high rate is necessary to inflate the revenue side of the budget, to facilitate the fulfillment of its expenditure side. That is, to invest more in medicine, education and to have enough money for social benefits.

As for the data of the National Bank, the rate of 28.6 and higher was given to forecast inflation. This is the consensus view of the National Bank and an unofficial forecast, it does not give an official one. Such forecasts can be revised at least monthly.

However, the pessimistic forecast sounded also from the Forex Club. Analysts expect a quick rise of dollar: over the next year, in their opinion, it will fluctuate from UAH 28.3 to UAH 28.9. And this is subject to moderate economic growth. High energy prices, analysts suggest, are capable of raising the dollar even higher - up to UAH 33-35.

Certain factors really put pressure on the stability of the hryvnia. Let's figure out how significant they are.

Factor 1. China crisis for Ukraine

In China, local authorities have begun to seize the proceeds of developer Evergrande, which is on the verge of default. Its debt is about 2% of China's GDP. Previously, it was the most successful Chinese developer, but he was the first to "go". This is not a reason, but a symptom of the market situation: we see high housing prices and low purchasing power of the population.

The scale of the problem is so great that experts who had previously dealt with the debt of the American investment bank Lehman Brothers were invited to restructure the giant's debt (it was after its collapse in 2008 that the global financial crisis began). Whether the Chinese Communist Party will save the developer is a big question.

You say: China, of course, is having a hard time, but what does Ukraine have to do with it?

The hryvnia is devaluing, and the dollar is becoming more expensive due to the reduction in the inflow of currency into the country, in particular. That is, if Ukraine is faced with a grain harvest failure, a significant drop in metal prices. The situation with the Chinese developer just threatens us with a decrease in the inflow of proceeds from key export items. In the news from China, prices for iron ore have already dropped from $ 220 to $ 100 per ton. A decrease in world prices for metal is also expected.

I must say that the most powerful bubbles are inflated on the commodity markets, which may soon burst. These bubbles are growing due to the demand for raw materials, which in turn increases due to the financial support of the population by the authorities of the countries of the world during a pandemic. But the printing presses for money are slowly turning off.

So far, despite the situation in China, the metal and ore market is still positive, especially compared to last year. The hryvnia is also strengthened by the record Ukrainian harvest (according to the Ministry of Agrarian Policy, 44.8 million tons), which is sold at fairly high prices - it should be enough for a long time.

Factor 2. Falling attractiveness of Ukrainian government bonds

In September, non-residents or financial speculators reduced the volume of Ukrainian bonds of the domestic government loan, withdrew funds in dollars. According to the National Bank, in a few days in September, foreigners sold our bonds worth UAH 2 billion. But the yield on our bonds has already begun to increase, trying to keep the interest of non-residents.

"Now the situation with government bonds is positive for the hryvnia: non-residents are returning to the market for our bonds, the cost of which at primary auctions again soared to 12% due to the discount rate increase of the National Bank by 3.5%," says financial analyst Oleksiy Kushch.

For the hryvnia, this is fraught with strengthening, because domestic government bonds in Ukraine are a way to cover up budgetary and currency gaps. The more government bonds are bought, the stronger the hryvnia, and vice versa.

In the medium term, the trend may change due to changes in the monetary policy of developed countries.

Related: Ukrainia reporters attacked in bank office, manage to restore video footage of incident

Inflation rates in Europe and the United States are higher than planned during the pandemic. The US Federal Reserve and the European Central Bank cannot consistently pursue quantitative easing policies. It is impossible to print money indefinitely, so it was quite expected that the policy would be corrected.

Representatives of the US Federal Reserve have already announced the reduction of the emergency stimulus program by $ 120 billion per month. That is, the dollar flow may decline, the currency will become scarcer and stronger.

So far, the base discount rate has been kept at the level of 0-0.25%. But then experts predict its growth, growth in the yield of US Treasury bonds. And these bonds are much more reliable for investors than Ukrainian government bonds. Changes in the United States can become a common "pain" for developing countries - not only for Ukraine.

In addition, global analysts also talk about the risks of a shutdown in the United States in connection with the struggle between Democrats and Republicans over the volume of national debt. Against the background of such uncertainty, investors will prefer reliable gold over Ukrainian government bonds.

Factor 3. Uncontrolled inflation

Industrial inflation around the world is 3-4 times higher than consumer inflation, that is, the production of goods rises in price faster than the goods themselves in finished form. Because of this, macro-financial stability is under threat, which also affects Ukraine.

Inflation in Ukraine already exceeds 10%, which cannot but frighten the people. If it grows even more, people will run to exchangers to save their money, and the exchange rate will speculatively jump on high demand.

Factor 4. Seasonality and gas prices

Inflation works to raise the cost of our entire line of energy imports, from coal and gas to oil and oil products.

The country is preparing for the heating season, spending on gas is growing, and since they are in foreign currency, the dollar is becoming more expensive. This is a stable seasonal factor.

However, this year the energy market is turbulent, with gas prices hitting all records. The Ukrainian Energy Exchange says that now the price of a cubic meter of gas for industry is UAH 18.5, but in a couple of weeks it may exceed UAH 30. And the news on Nord Stream – 2 is pressuring the hryvnia exchange rate. So the factor of the heating season increases the impact on the hryvnia exchange rate.

"With all this, the danger is the growth of the population's debt for housing and communal services. The fact that such a significant amount has been accumulated even before the start of the heating season is a wake-up call. Since this problem will have to be solved in one way or another, it will affect the state of finances in the country. If something is extinguished at the expense of budget funds, this will also affect the dollar rate," says analyst Olexiy Kozyrev.

Factor 5. Payments on debts of the country

The period of September payments could have been very painful for Ukraine, but it accepted the pill from the IMF in the form of 2.7 billion special drawing rights. Even if it does not heal the source of pain, and the use of this gift can literally be very expensive for Ukraine, the money "pill" helped to pay off other debts of our country. Although the funds will be taken into account in the reserves, they will be used to service the external debt. The head of the Bank Council Roman Shpek has already announced a stable payment schedule.

By itself, the provision of special borrowing rights worked to strengthen the hryvnia. Without the IMF tranche, the printing press would have to be turned on again, which would depreciate the currency.

The prospect of new tranches in late November or early December is still dim. Ukraine has not yet fulfilled many of its obligations under the memorandum with the IMF. But, most likely, the money will be provided. Reducing the deficit in the draft budget for 2022 contributes to this.

Obtaining loans can give a positive signal to foreign investors who will return to OVDPs, which means they will sell their dollars on the foreign exchange market and buy the hryvnia, strengthening it.

Factor 6. Politics and the coronavirus

There are also global, hard-to-predict risks for the course. First of all, political onees. These are both the possibility of aggravating the conflict in Donbas, and the risks of the disappearance of the mono-majority in parliament, the reformatting of the government, which may lead to the depreciation of the hryvnia. Of course, the coronavirus still cannot be written off.

At the same time, there are chances for an improvement in the business climate and an increase in investment, which could lead to a strengthening of the national currency.

What numbers in exchangers to expect until the end of the year and in 2022

All these factors do not put too much pressure on the hryvnia yet.

"The course is balancing on the basis of various factors. The question is in which direction the balance will develop: towards positive or negative. At the moment, it is developing towards positive, but this may not last very long: starting from November, the opposite trend is possible. However, I don’t see reasons for deep devaluation of the hryvnia now,”comments Oleksiy Kushch.

In the event of devaluation risks, the National Bank has sufficient funds and market mechanisms to control the exchange rate formation in accordance with the market laws of supply and demand.

But if the National Bank keeps the hryvnia afloat, it will be very careful. Experts agree: although the Ministry of Finance might be interested in this, the NBU is unlikely to artificially buy out the currency in order to create its deficit in the market. It is not against a smooth devaluation.

Until the end of the year, quotations are unlikely to exceed UAH 28: the dollar exchange rate will fluctuate between UAH 27-28, while maintaining the trend towards a gradual revaluation of the national currency. This assessment is unanimously given by economic experts and financial analysts. So, in exchange rate dynamics, everything is much more boring than it seems at first glance.

Experts are extremely cautious with forecasts for 2022

"It's like planning a flight into space," says Kushch. "Next year will be very important: everything will depend on what model of the world economy will be. Whether it will enter the phase of economic growth, or will the forecasts come true with the crisis in the United States and China? If a serious crisis breaks out, it will affect the global reduction in the consumption of metal and food. This will drastically affect the hryvnia.

The expert notes: the hryvnia exchange rate will be influenced by whether the so-called policy of "monetary burning", the growth of interest rates of the US Federal Reserve System and quantitative contraction, or the policy of quantitative expansion and zero interest rates will continue.

"If the Americans start raising rates and squeezing liquidity at the global level, there will be a colossal outflow of funds from emerging markets," Kushch said.

The expert does not exclude that in case of a negative confluence of factors, the dollar may be much more expensive than UAH 28. However, according to him, this is only the most pessimistic scenario, which may not come true at all.

Bonus: whether to trust the dollar

The universal advice of all financial analysts: salaries are saved not by a specific currency, but by risk diversification. Investments should be laid out in different "financial baskets": dollar, euro, hryvnia - equally. However, many Ukrainians, by inertia, invest more in the American currency, the reliability of which is now in question.

When the world first entered quarantine, the American currency jumped in value. But due to the release of a large amount of the dollar into the markets, this currency began to depreciate. Traders refused large purchases of the dollar and more often preferred the euro, as a result of which it strengthened on the stock exchanges.

However, after the change in the US monetary policy, this trend will freeze. Experts predict stability for the dollar due to its perception as a "safe haven currency" and the most liquid asset.

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