There are no objective reasons for hryvnia depreciation

Posted by Alexander Okhrimenko on 13/12/13
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In Ukraine, unlike the EU countries, there is a very big dollarization of the economy. 87 billion cash foreign exchange turns over on the territory of Ukraine, mostly US dollars.  Therefore, the question of the dollar/hryvnia exchange rate in Ukraine is every Ukrainian’s concern. Many Ukrainians keep their savings in cash dollars; a part of these dollars is kept at banks on deposits, which is approximately 22 billion dollars, but a part – in the cupboard at home. This specifics of the Ukrainian economy makes it considerably different from the EU countries and other developed countries, however, at the moment dollarization of the Ukraine economy is impossible to significantly reduce.

Some international rating agencies, such as Moody’s, were quick to state that there is an increasing risk of the hryvnia devaluation due to the events on the Euromaidan. But they are most likely to be wrong in their statements. Last year saw the same situation when the demand for foreign currency was low and significantly increased in the autumn. This year the same situation repeats again. It is mainly because common Ukrainians and Ukrainian businessmen purchase foreign currency more vigorously at the end of the year.

At present the dollar/hryvnia exchange rate at the interbank foreign currency market equals to about UAH 8.27. In December the dollar/hryvnia exchange rate significantly fluctuated at the interbank foreign currency market. The market participants could see the rate of UAH 8.3 and UAH 8.18. However, these fluctuations, as a rule, did not exceed 0.5% during one trading session. Since the beginning of the current year the dollar/hryvnia exchange rate has devaluated by 3.1%. This is evidently less than the currency devaluation in Russia or Poland. That is why a number of Ukrainian and foreign experts are in a hurry to claim that bigger hryvnia devaluation is needed. Although it is a disputable question as there is the opposite point of view that the hryvnia devaluation must not exceed 2.5%-3% a year to avoid making trouble for Ukrainians who possess foreign exchange, and the Ukrainian business. It should be remembered that Ukraine is not only an export orientated country but also a country which buys a lot of import goods, first of all – natural gas and petrol. That is why the devaluation of the national currency on a larger scale might cause hyperinflation, which undoubtfully cannot be called a positive factor.

At the moment the gold and foreign exchange reserves of Ukraine is 18.8 billion dollars and as far back as at the beginning of the year they were at the level of 22 billion dollars. But it must be remarked that Ukraine has repaid the IMF loans for the amount of almost 6 billion dollars along with the accrued interest. That is why the decrease in the gold and foreign exchange reserves was quite expected. Relatively not a long time ago Ukraine concluded a number of contracts with China which can very soon provide an inflow of state investment into Ukraine for the amount of 5 billion dollars, which will enable it to increase the gold and foreign exchange reserves. So, the level of the gold and foreign exchange reserves should not be considered critical although it cannot be considered big.

It should be remembered that this year Ukraine has a surplus of the balance of payments in the amount of more than 1 billion dollars and the last year saw a considerable deficit. That is why there is a margin of safety for the Ukrainian hryvnia.

At the moment the NBU with the help of targeted foreign currency investment at the foreign currency market and with the regulation of the banking system liquidity influences the general dynamics of the hryvnia exchange rate. That is why the attempts of certain foreign currency speculators to use the situation and to provoke the currency panic failed and will probably fail again. As a rule, at the end of the year Ukrainians are more actively selling cash foreign currency as they need hryvnias to buy holiday presents. As a result, the supply of the cash foreign currency is growing. At the same time business is not very active and the demand for foreign currency for import contracts is decreasing. As a result, the hryvnia devaluation may even occur closer to the end of the year.

A big amount of cash foreign currency available in Ukraine creates a special distinctive feature of the foreign currency market. That is why not only the dynamics of foreign currency from exporters and importers and also the inflow and outflow of investment have to be taken into consideration but also the dynamics of the purchase and sale of cash foreign currency by the population. At the moment it is exactly the foreign currency market which can considerably influence the dynamics of the foreign exchange rate. And although it greatly depends on emotions, but in general this is a pragmatic segment of the market orientated to obtain economic benefits rather than to the political statements on the Euromaidan.


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