Keeping tight rein on hryvnia

Chief Economist at Dragon Capital Olena Belan has also explained stabilization and strengthening of the hryvnia against the dollar with external factors, including a significant increase in prices of steel and iron ore on the world markets.

The Ukrainian hryvnia for the past two weeks has been consistently growing stronger against the dollar on the interbank foreign exchange market and, subsequently, on the cash market as well. While earlier, in January-February, the official rate of the national currency has dropped 13.4% against the greenback – to UAH 27.20-27.30/USD, the overall trend broke in March, with the hryvnia gaining 3% against the dollar – to UAH 26.20-26.30/USD. In April, the trend continues: on April 15, the National Bank (NBU) set the rate at UAH 25.47/USD. That is, the national currency has won back its position of late January 2016.

The NBU is taking advantage of the situation to replenish its international reserves. After selling $233 million more than buying on the interbank market to support the hryvnia in January-February, the regulator’s net sales of foreign currency in March declined to $2 million. In April, the NBU has not yet sold a cent, while already having held six auctions for the purchase of foreign currency, including one – at a fixed rate. The NBU has purchased a total of $264 on the interbank market in the said period.

Trade volumes on the interbank foreign exchange market are also growing: in January-February, their average was about $300 million while in March-April, it was more than $350 million. The spread on black currency market has shrunk: the current market price of purchase and sale of the dollar is UAH 25.5-25.6/USD, while the volume of offers for the sale of the dollar exceeds the purchase index, which means a reduction of speculative demand for foreign currency.

In late January, the NBU explained the fluctuations in the currency market with a long public holidays period and the seasonal drop in business activity, as well as large-scale payments to the Treasury Single Account (UAH 30 billion in late 2015). In February, the list of causes was supplemented by political instability due to the reformatting of the Cabinet. In March, there was Catholic Easter in the U.S. and Europe. However, the hryvnia has been strengthening steadily.

UNIAN has interviewed a number of experts about the causes of this phenomenon and the stability of the new trend.

A pleasant surprise

Bankers named additional capitalization of banks one of the reasons for the rapid growth of foreign currency supply on the interbank market in April. "A hike in offers would be most logical to explain with the fact that the banks are going through the procedure of additional capitalization, which means that it is likely that one of the banks has sold the currency to replenish the regulatory capital," said Kateryna Volodina, a director of the department of operations in financial markets at UniCreditBank, commenting on the record purchase by the NBU of the foreign currency on the interbank market on April 7 in the amount of $147.5 million.

Volodina did not specify the name of the bank; however, according to dealers of commercial banks, it could be a subsidiary of the Russian-based Vnesheconombank – Prominvestbank, which in late February reported the completion of the necessary procedures for additional capitalization in the amount of $800 million. Besides, in early April, UniCreditBank also replenished its capital, as its shareholders on March 31 approved the first tranche of the capital increase in the equivalent of UAH 3.8 billion. It had to be transferred in two phases – on April 1 and April 4. On April 18, head of the bank Tamara Savoshchenko reported that the shareholders approved the capital increase results, that is, the money has come in. Obviously, part of the currency received from the parent structures was sold on the interbank market in order not to violate the norms of the NBU.

At the same time, additional capitalization of banks is not the only reason of the hryvnia’s strengthening. As Volodina noted, the volume of export revenue has also increased recently, so the exporters started putting up for free sale slightly more currency than before.

The growth of export revenue was also mentioned by the head of the board of ACI Ukraine, Pavlo Kozak. "The main reason for strengthening of the hryvnia on the currency market is that the situation on the world market is favorable for Ukraine. The main sellers of currency are metallurgists, and the price of their products is currently showing positive dynamics," said the expert. According to him, even if they have not yet started to receive foreign currency transfers, the metallurgists may take foreign currency loans under the expected revenues.

"On the other hand, Ukraine’s imports from abroad continue to slow down. Given the fact that the price of gas for our country in the next six months will be calculated based on the low price of oil, which was this winter, the prospects of the hryvnia exchange rate look quite optimistic," said Kozak with the proviso that the picture is a bit stained with uncertainty of further cooperation with the International Monetary Fund, as well as political instability due to the change of government.

Chief Economist at Dragon Capital Olena Belan has also explained stabilization and strengthening of the hryvnia against the dollar with external factors, including a significant increase in prices of steel and iron ore on the world markets.

"As long as such a favorable external situation prevails, the hryvnia exchange rate will fluctuate in the range of UAH 26-27 /USD. In the coming months, the internal factors can also affect the rate. If the resolution of the political crisis will lead to a rapid recovery of lending from the IMF, then there will be another positive factor for the exchange rate, and a further slight strengthening of the national currency can’t be ruled out," the expert said, although noting that the delay in cooperation with the IMF and the rollback in reforms would adversely affect the hryvnia.

Let’s hope that the experts are right. But foreign trade data for March are not made public yet, while those for January-February are disappointing. The deficit of foreign commodity trade totaled $731 million, which is 2.9 times higher year-over-year.

As for the IMF, the Fund has already declared readiness to continue cooperation with the new Government of Ukraine. “We are ready to continue supporting Ukraine, and are waiting for a meeting with the new government," said Poul Thomsen, Director of the IMF’s European Department speaking at a press briefing in Washington April 18, stressing that the Fund is ready to complete the process of agreeing on the second revision of the program of Ukraine’s reform, approved in March 2015.

Thus, there are hopes that the positive trend for the hryvnia will stay for a longer term. And then there is a logical question: how will the unexpected strengthening of the national currency influence Ukraine’s economy and the wallets of regular citizens?

Everything will be fine, won’t it?

Head of the analytical department at ICU Oleksandr Valchyshen believes that the strengthening of the hryvnia will have a positive impact on the national economy. He predicts that this trend will continue until the end of summer, or even until late 2016. In his view, the Ukrainians should feel the effect of the strengthening of the hryvnia in the shape of a further recovery of the economy, the real GDP growth, the resumption of lending by the banking sector, and higher wages.

As explained by Executive Director of the Independent Association of Banks of Ukraine Olena Korobkova, inflation is tied to the exchange rate, and the strengthening of the hryvnia means that imports will not get more expensive; instead, it may even get cheaper. According to her, there is every reason to expect a slowdown in inflation, but at the same time we shouldn’t expect any price reduction in the short term. "The steady trend of the hryvnia’s strengthening is a positive signal to the public and businesses that the Ukrainian economy started to recover. This is an important psychological factor that removes the panic inherent in the population during the crisis, which has always put pressure on the currency market," she said.

According to the association’s estimates, by late April, the NBU’s gold and currency reserves will have grown to $13.3 billion, which will become a beacon for the IMF in terms of further cooperation with Ukraine. As the international reserves will be increasing, the regulator will loosen up administrative restrictions on the forex market, which will also contribute to a better well-being of population and give a new impetus to the development of business in Ukraine. Among these restrictions is the one on issuance of cash at the cash desks and ATMs, on buying cash foreign currency by individuals and non-cash currency by banks. There is also a rule on the mandatory sale of 75% of foreign exchange earnings, the ban on early repayment of loans to non-residents, prohibition of return of investment and the transfer of dividends to foreign investors, the obligation of banks to coordinate with the NBU the applications for purchase of foreign currency exceeding the equivalent of 50,000.

In fact, there are polar opinions. "Strengthening the national currency, on the one hand, increases the level of welfare of the population, and on the other – it is a blow to exports, since it makes it more expensive, thus reducing demand," says a senior analyst at Alpari Vadym Iosub.

According to his estimates, the effect of the exchange rate on the trade balance has a nearly three-month delay, and this effect becomes noticeable when it comes to a substantial and sustainable strengthening of the national currency, by at least 5-10%. "Short-term and a slight strengthening of the hryvnia will hardly be noticeable to the economy as a whole, and for ordinary citizens as well. One shouldn’t expect any growth of well-being, since there is no certainty that the revaluation of the hryvnia is, in fact, a long and stable trend," the expert said.

It should be noted that the NBU’s behavior this year showed a new corridor for the national currency, as it was intervening on the interbank market with the offers for the purchase of the dollar below UAH 25.5/USD and throwing currency at bankers at above UAH 26.5/USD.

Commenting on the last auction at a fixed rate, the NBU said that such an intervention is not evidence of targeting a specific rate, and a flexible exchange rate regime is still in place. Moreover, the NBU has vowed to smooth excessive fluctuations on the market in the future.

At the moment, all of the above is helping hryvnia not only to hold its positions, but also strengthen. And statistics show that the population has sold more currency than it has bought over the past year. That is, either the Ukrainians have become less sensitive to the forex fluctuations, or they have wasted all hryvnia available, which could be spent on the purchase of the dollar or the euro.