Fortunately or not, economic analysts cannot keep pace with their peers in politics, who normally air their conclusions immediately after an event. Economic statistics, and resulting economic analyses, are a rather sluggish and time-consuming matter. But on the other hand, this allows analysts to make painstaking and informed conclusions and recommendations. It therefore makes sense to analyze the nation’s foreign trade figures over the past several months. Aside from determining the rate of GDP growth, these figures have the greatest impact on the exchange rate dynamics of the hryvnia, and therefore largely affect domestic prices.
Let’s start with the good news: September saw continued growth in the surplus of the nation’s balance of payments, primarily in foreign trade. It rose by another half-billion US dollars compared to previous months. Even though these figures are proof of slower growth than in the period from January through August, they are in line with seasonal trends. The trend continued toward a growing trade surplus and a higher surplus in the commodity balance, despite somewhat slower growth dynamics, which are due to the seasonal rise in imports. (Moreover, to contain price hikes in the domestic market the government tightened restrictions on meat exports and liberalized meat imports).
Overall, cumulative export growth continued to slow down, but positive dynamics were discernible, much like in the same month last year. Owing to an upward trend in exports, September comes second only to April. Needless to say, September grain exports were the highest since the beginning of the year, reaching the level of the 2002 bumper crop. The growth in metal exports in September of this year, which slowed down somewhat in September last year, accelerated to the level of April 2004 and was a mere $113 million below this year’s highest growth rate recorded in May 2004. Meanwhile, the dynamics of growth in machinery exports slowed down somewhat versus last year’s upward trend.
Overall, the asynchronicity in imports, which is typical this year, continued in September. After a sharp decline in August, import volumes in September returned to the July level. Similar fluctuations were observed last year. Investments followed a similar pattern. We can assume the possibility of a seasonal increase in capital investments after an investment slowdown in the second quarter and in the summer months of the third quarter. After all, in September of this year the volume of imports of machinery and equipment increased at five times the rate of import growth in September 2003.
However, exports and imports continued to grow out of sync. Export growth outpaced import growth by almost as much as it did in the first half of the year. This is improving the balance of payments and laying the macroeconomic foundations for a major influx of hard currency in the fourth quarter. This increases the probability of a $6.4 billion annual surplus in the current account.
However, in the last months of the year the following countertrends will affect the current account, the balance of payments as a whole, and the tactics of the currency exchange rate policy. Although the expected increase in agricultural exports will speed up the influx of hard currency, likely future oil price hikes will have the opposite effect. As a result, the demand for hard currency will increase among importers. Therefore I think there is no urgent need to change the tactics of managing the hryvnia exchange rate. After all, in view of the need for significant sterilization of the excessive money supply, it is quite risky to weaken the exchange rate, thereby fueling inflationary expectations that go hand in hand with devaluation expectations.
The risks of this period are determined by the fact that the influx of capital through direct foreign investments and participation in privatization will be coupled with a probable capital flight, albeit an insignificant one. Meanwhile, a certain deceleration in GDP growth and growing consumer demand in the past two months, as well as investment rates maintained at a high level, may somewhat reduce the surplus in the balance of payments. At the same time, the rate of growth in deposit balances, which is outpacing the rate of growth in investment demand, makes the prospects for its further growth more likely.
In this situation, the government and the National Bank — no matter who wins the presidential elections — will seek to consolidate fiscal legislation, improve the schedule of foreign loans, support agricultural and metal exports (to replenish reserves), increase electricity exports, and speed up the signing of agreements with the IMF on advanced standby loans and with the World Bank on structural projects. Here’s hoping that these and other measures will help maintain a healthy rhythm in foreign trade, thereby minimizing the probable risks for the exchange rate policy.
