Foreign exchange and gold reserves of the National Bank of Ukraine (NBU) have shrunk by almost a third over the past 18 months. According to the NBU, reserves stood at 23.144 billion dollars in June 2013, sharply down from 31.364 billion dollars in January 2012, and the decline has become especially fast since this May, with reserves falling by 8.3 percent to the low set in March 2007. The analytical group Da Vinci AG’s Ukrainian Economic Trends Forecast joins the NBU in pointing out lingering downward risks for forex and gold reserves. The analysts note that the reserves still cover three months’ worth of imports. “It must be emphasized that the latter figure is also declining due to government policies pushing imports lower,” the paper reads.
The circumstances raise the question about the hryvnia’s future. After all, the people have fresh memories of the fall of 2008, when the hryvnia fell by more than a third, and the national currency’s situation is constantly causing more anxiety than confidence in its stability on the part of many analysts. According to them, the currency stability is undermined by the fact that Ukraine still has not managed to reach agreement with large international organizations (for instance, the International Monetary Fund) to provide low-cost loans. Meanwhile, the currency market continues to be severely stifled by the policies including passport controls for natural persons engaging in currency transactions and the mandatory sale of foreign currency earnings by exporters. It seems that the only positive fact in this situation is the country’s improving trade balance, if we are to believe official announcements. In other words, Ukraine’s goods imports have decreased.
Thus, according to the director of the economic development strategic planning department at the Ministry of Economic Development Yevhen Oleinikov, the foreign trade deficit decreased by 2.3 times to 2.4 billion dollars in January-May 2013 year-on-year. “These are the first results of the ongoing economic change,” he says.
To understand what will happen to the hryvnia in the near future, The Day asked experts. According to them, the authorities will try to keep the hryvnia within the current exchange rate band in the short term, as it was in the recent years. “The hryvnia may keep its current exchange rate, or it may not. It depends mostly on what the National Bank and the government want. I think that the hryvnia-dollar rate will remain at 8.15 to 8.20 or will go higher to 8.50 to 8.80 in the remaining months of 2013. I believe that for the time being, half a year to a year, one should not worry much. Reasonable people would put the money on the hryvnia deposit and enjoy higher interest rates,” financial analyst and a managing partner of Capital Times Eric Naiman explains.
At the same time, the chairman of the Penta Center for Applied Political Studies Volodymyr Fesenko notes that the question of the exchange rate stability has a strong political flavor in Ukraine. “Historically, we have seen the exchange rate as an indicator of social and economic stability. A moderate devaluation of the hryvnia would be in the nation’s economic interests, as it would benefit our exporters and could improve the domestic financial situation a little. But psychologically, society would dislike it,” Fesenko stresses.
At the same time, he explains that the question of letting hryvnia to float freely will become particularly salient this fall, “because they will need to decide how to ensure financial stability. One way is an agreement with the IMF, another is looking for other sources of financial assistance, but these will be more expensive. I think that neither the Cabinet nor the president or the National Bank have the answer to this question right now. So far, a steady exchange rate is the best option,” the expert notes. However, Fesenko accepts that refusal to allow even a small devaluation now may make for a negative surprise for the election headquarters of President Viktor Yanukovych at the worst possible moment. “A politically disadvantageous situation may arise if the economic situation deteriorates at the beginning of the 2015 presidential campaign and pushes the rate down,” the analyst emphasizes.
The ruling party members have less pessimistic forecasts. For example, a member of the Party of Regions’ political council Oleksii Plotnikov believes that no fundamental changes are in the offing. “The current rate will hold until the end of the year. The National Bank is well placed to support it. Among other things, it has both monetary and non-monetary controls available,” the politician remarks, and adds that the exchange rate may fluctuate a little after that point. “We might see the rate at 8.3 hryvnias to the dollar come 2015, but not higher, especially since we do not have any unusual demand for foreign currency. Reserve levels are changing, but not catastrophically. Exports and imports have been balancing out, and economic growth has been improving,” Plotnikov stresses. At the same time, he argues that ordinary people ought to diversify their savings, going beyond the national currency. “Hryvnia deposit rates are higher than forex ones at the moment. Therefore, Ukrainians may create their own currency baskets, composed equally of hryvnia and non-hryvnia-denominated savings,” the economist emphasizes.
At the same time, the National Bank clings to its anti-crisis measures. For example, exchange offices still demand passports from currency buyers, despite the scandalous leak of confidential data. Experts believe that one should not expect the measure’s abolition in the near future. “They may stop asking for passports from currency sellers, but still demand them from buyers,” Naiman notes.
In addition, it was reported recently that cash payments will be limited to 150,000 hryvnias starting on September 1, 2013. However, the limits on cash payments will not affect remittances coming to Ukraine from abroad. Still, experts doubt this measure will lead to significant changes. “This is a plus for stability,” Naiman maintains, while Plotnikov is confident that this move will help to combat shadow economy and promote the transition to cashless payments. “Many countries have some limitations. For example, such transactions are limited to 3,000 to 5,000 euros [32,300 hryvnias to 53,900 hryvnias. – The Day] in France, Norway, and the United Kingdom, and the US limits them to 2,000 dollars [16,000 hryvnias. – The Day],” he adds.
Meanwhile, the chairman of the Ukrainian Credit and Banking Union Borys Soboliev is sure that all abovementioned factors can provide just a temporary respite for the hryvnia. Prospects for its stability can be clarified as soon as the end of November 2013, when the EU will hold its Vilnius summit where Ukraine is expected to sign agreements on association and free trade area with the EU. “If we join the EU, all of our investment ratings will immediately soar, making foreign loans cheaper. That is, the Vilnius summit will be an important test and the decisive force for the stability of the hryvnia in the long term,” he says. According to him, Ukraine has to choose the path of European integration, and to do so as early as possible, “as the Ministry of Finance and the National Bank should repay 5.5 billion dollars in loans before the end of 2013, and there is no way to obtain these funds at a reasonable price outside of the foreign credit markets,” he stresses.
Chief economist of the investment company Dragon Capital Olena Bilan, too, thinks that Ukraine would feel positive effects of the agreements in the long term. “These documents, in particular the agreement on free trade area, would affect exports and economic growth, but the impact would not be felt before the second half of 2014. We expect that the hryvnia will remain stable at 8.20 to the dollar until the end of 2014,” Bilan adds.
