Hryvnia’s troubled autumn
The interbank market has for the past several days been seeing an increased demand for foreign currency, pulling the hryvnia down. Expert opinions on how the national currency will survive traditional autumn anxiety and winter colds have divided.
Participants in Ukraine’s interbank foreign currency market following summer calm have for several days been witnessing the increased demand for the American currency. The weighted average rate of the Ukrainian hryvnia on the interbank market, according to the National Bank, is approaching UAH 26 / USD, that is, the national currency has lost its positions won six weeks since mid-July. The quotes of the cash market show the dollar trading already at UAH 26.3 – UAH 26.5. Of course, Ukrainians took note of the tremors, anxiously watching the tags in exchange booths.
Given the increased demand for foreign currency, the National Bank on August 31 for the first time after almost a two-month break came out on the interbank market with the foreign currency sale offer. However, the market showed an increased demand for the dollar even after the auction was completed. On Tuesday, September 5, the NBU announced an auction for the sale of foreign currency worth up to $100 million, to support a weakening hryvnia.
The national currency has not yet reached the level of 27 UAH / USD, laid down in 2017 state budget, remaining even further from the historic low of February 2015 (UAH 30.01 / USD). But Ukrainians are already asking the question of how the hryvnia will survive the period of traditional autumn turbulence in the foreign exchange market.
The National Bank looks to the future with optimism.
"Fundamental factors remain favorable for Ukrainian exporters, in particular, the conjuncture in world steel and iron ore markets. Over the past months, export earnings continued to grow, on average exceeding last year's figures by about 15%. The proceeds from exports of agricultural products continue to flow in considerable volumes," the regulator reported, commenting on the situation on the foreign exchange market.
Experts expect no sharp and deep fall of the hryvnia, either. At the same time, their views on the expected exchange rate of the national currency in the coming autumn and winter months vary.
The majority of experts polled by UNIAN say that it is highly probable that the hryvnia, unlike at devaluation periods characteristic of previous years, will avoid the fall due to a number of positive factors this autumn.
Coordinator of the Nova Kraina [New Country] public platform Taras Kozak believes that this autumn Ukrainian hryvnia is not threatened by anything, while the rate will fluctuate in the range of UAH 24.5 – UAH 26.5 / USD. In case of more successful privatization efforts and adoption by Parliament of the legislation on the free circulation of agricultural land, hryvnia strengthening to UAH 22 –UAH 23 / USD can even be expected, the expert suggests.
According to Mr Kozak, in previous years the hryvnia exchange rate traditionally declined in the autumn due to the growth of gas purchases and imports of consumer goods, as well as uneven budget expenditures and unfavorable conjuncture of foreign markets. This time, the Ukrainian authorities did a serious job to level these factors.
"This is about the transition to 3-year budgeting, the refusal to restrain the hryvnia exchange rate "to the last moment," and the refusal to purchase gas from the aggressor state. The external situation this year is also favorable, while we also expect a good grain harvest," Kozak said.
Head of the analytical department at ICU Group Oleksandr Valchyshen also believes that the Ukrainian foreign currency market is no longer so seasonally affected, as it was before, and predicts a calm autumn for the national currency, as it was at the end of 2004.
"The main factor that the market is currently driving is the external one: a weakening of the dollar against other major currencies and a complete leveling of the fear factor regarding Chinese economy, which was strong enough in early 2017 and in 2016. Internal factors are mostly offset by the ‘cleansing’ of the financial sector," the expert believes.
Analyst at Dragon Capital Serhiy Fursa also sees no prerequisites yet for a significant weakening of the hryvnia against the dollar, predicting the rate before the end of the year at about UAH 25 – UAH 26 / USD.
"The hryvnia does have a seasonal autumn weakness, which was contributed to by the high demand for energy, peak purchases of imported goods ahead of the new year, and the behavior of farmers who transferred their revenues to dollars. But it’s not 100% that this will happen this fall. The trend is different," the expert said, also recalling the favorable situation on foreign markets, strong exports, as well as high revenues from seasonal workers flowing from Poland, and the National Bank's cleansing of the banking system.
Head of Concorde Capital’s analytical department Oleksandr Parashchy, just as previous experts, does not foresee sharp devaluation leaps, taking into account the "dropping" of foreign currency by the population and the resumption of growth in resource prices. At the same time, he recommends taking into account that additional export earnings after a few months are transformed into a more daring investment demand, which in turn accelerates investment imports with subsequent expansion of the trade deficit.
"Therefore, we forecast a deficit growth in the second half of the year and the resumption of a moderate devaluation pressure in the autumn months. Also this autumn, we should expect a decrease in the population's activity in selling foreign currency. And in the case of sharp exchange rate changes, we can also expect an active purchase [of foreign currency],"the expert said, calling the most likely autumn rate at UAH 27 – UAH 28 / USD.
In addition, Paraschy recalled that the key risk for the hryvnia remains the uncertainty factor of Ukraine’s further cooperation with the International Monetary Fund.
"Usually, new tranches calm hryvnia expectations down. It seems that the next tranche is already "laid down" in its price and, if by mid-autumn there remains uncertainty on the tranche, there is a risk of a sharp devaluation," the expert warned.
Whether there are any threats to the hryvnia in the upcoming autumn-winter period, will become evident as early as September, when the next IMF mission arriving in Kyiv September 12 completes its work. There are reasons for concern, since the key requirements of the previous EFF revision, including the acceleration of privatization, development of the agricultural land market, progress in fighting corruption, and the implementation of pension reform, have not yet been fulfilled by the Ukrainian authorities.
Also, we should not forget that the year of elections is approaching, boosting populist sentiments of certain Ukrainian politicians. Populist initiatives cost money and, as a rule, turn into further inflation and devaluation. The coming autumn will become a clear catalyst for whether the current political forces have come to power with good intentions to change the country seriously and for long, or just simply want to hold out until the next elections to the Verkhovna Rada, like their predecessors. The foreign exchange market will closely monitor their behavior.