A 180° exchange course:
What's going to happen to the hryvnia
regularly intervened in the FOREX market, buying up hard currency and strengthening the hryvnia. The impression, thus, has been that everything’s just fine in Ukraine. However, the minute serious foreign debt servicing begins, it will be clear that these inflows to the balance of trade account were really marginal compared to what was actually needed. And the deception will be exposed like a September fog under the warm noon sun. If the country doesn’t have any spare sources of financing at that point, there will be no way to avoid the return of hryvnia instability.
A TASTE FOR RISKS
The strengthening of the hryvnia has lasted for some time, but it’s a passing phenomenon. By the end of the year, the risks will remain at today’s levels, because no serious debt payments are planned. This means that there’s also unlikely to be any sharp movement in the hryvnia. Moreover, the currency could gradually depreciate simply with the seasonal influx of growing imports, and with them, a growing current account deficit.
Still, this devaluation is unlikely to be more than 10%, because the balance of payments will remain relatively balanced. The NBU has enough instruments in its financial arsenal to smooth out any local deficit of hard currency on the market. That this is likely can be seen in NBU interventions: over August, the Bank largely bought up hard currency, i.e., there was a surplus and the hryvnia kept inching up, but between August 31 and September 5, the regulator was forced to sell hard currency, which led to a noticeable improvement in the dollar, over 50 kopiykas within a few days. Soon, interventions involving the sale of hard currency are likely to grow in frequency, a clear indicator that the hryvnia exchange rate has begun to depreciate.
At the beginning of 2018, risks will begin to grow significantly because the question of where to find external financing to cover the country’s needs will loom ever more strongly. At that point, the equilibrium of the FOREX market could disappear and the amplitude of fluctuations begin to increase.
There is only one market factor that could prevent this scenario, and that is a stir on global financial markets due to surplus money, similar to what preceded the 2008-2009 financial crisis. The thing is that economic indicators have been improving around the world in recent months and uncertainty has subsided. As a consequence, the appetite for market risks has grown and capital has been glowing to developing countries. It’s possible to say that, in some cases, there has been real interest in assets in undeveloped countries. There are plenty of indicators of this, such as the fact that most currencies have grown stronger against the dollar lately, especially the currencies of poorly developed countries, while yields on government bonds in these countries have, in some cases, fallen to record lows.
Since the beginning of 2017, the euro has gained nearly 15% against the dollar, while the currencies of Ukraine’s western neighbors—Poland, Czechia, Hungary and Romania—, whose economies are closely tied to the eurozone, have grown against the dollar almost to the same extent. The currencies of many developing countries have strengthened by 7-10%. Even the Chinese yuan has gained 5% against the dollar. Yields on Bulgaria’s government eurobonds are now down to 1.67%, compared to 8% less than a decade ago, which is what Ukraine’s bonds are at now. There are plenty more such examples.
If this trend were to maintain for at least a few quarters, it would be clear that the capital that is currently actively looking for places to work in these countries would partly also come to Ukraine. All the more so as a recent survey by Institutional Investor covered 214 fund managers, 32% of whom said that, given a choice of Europe, the Middle East and Africa, their first choice would be to go to Ukraine, in order to study market opportunities. This kind of capital might even suffice to finance Ukraine’s demand for foreign currency. The question is whether this stir on global financial markets will last long enough, and for that there is neither certainty nor guarantee. And, even if there were, this form of capital inflow is very volatile: tomorrow, it could equally swiftly be standing in line to exit, having caused more harm than that from which it might save us today.
There are two more non-market factors that could potentially shift the balance of payments over 2017-2019 and thus have a significant impact on the hryvnia exchange rate. The first has about a zero percent likelihood, whereas the second is almost 100%. But each of them could potentially be decisive.
The first is the Yanukovych money. The confiscation of US $1.4bn of the Yanukovych Family’s money that was on Oschadny Bank accounts was a pleasant surprise for the Budget. Now there’s information about a half tonne of Yanukovych gold that investigative agencies have tracked down to Switzerlandю On one hand, it’s hard to count on the money stolen by that regime, because the process of finding and returning them to the state could drag on for years. On the other, the Prosecutor General’s Office has reported that the total stolen by the Yanukovych clique was nearly US $40bn. This cannot possibly all be in cash: a large proportion is in gold and possibly in tangible material assets such as property or ownership shares in businesses.
None of this is a needle in a haystack. It should be fairly straightforward to track these assets down and eventually confiscate them in favor of the state. Even if only a tenth of
The fall will bring a seasonal depreciation of the hryvnia, as a result of which the hryvnia should not go down any further than about
this were returned to the budget, it would provide serious support for public finances—most importantly for the balance of payments. If Ukraine’s investigative agencies continue their efforts steadily and persistently, they could return fairly substantial sums. This element in the stability of the hryvnia exchange rate needn’t be discounted, although when and on what scale it can be brought into play is something nobody knows for sure.
The second factor is the political cycle. Although Ukraine’s next elections come up only in 2019, barring a snap election, the campaigning has already begun, even if unofficially. This can be seen not only in the actions of the Poroshenko Administration, which is already actively searching for ways to ensure their boss is elected to a second term and eliminating potential rivals and the opposition: who are the more highly rated potential nominees and how often they show up on television. Election campaigns are for the Ukrainian politician what crushes are for the teenager: both sides lose their heads and behave in irrational ways.
In this situation, a rational approach means recognizing that the only definite source of external financing is support from the IMF and other international donors. But in order to qualify for it, the Verkhovna Rada must vote for the bills that will allow various reforms to go ahead. But how likely is it that the legislature will support reforms initiated by the President and a Cabinet that is friendly towards him, if all the election rhetoric of the multi-colored opposition is focused on criticizing this Administration? It’s much simpler not to vote for the necessary changes, get the IMF to stop lending, cause a currency crisis, and then blame the current government for everything in order to boost their own ratings. Even though this line of action is obviously aimed against the people and their country, it’s the shortest path to the top position in the land. Given that among Ukraine’s top politicians, very few act responsibly, the most likely scenario is that the Rada will be blocked and cooperation with the IMF stopped. The outcome—a hard currency crunch, hryvnia devaluation and the entire bouquet of problems that goes along with that—is something that most Ukrainians remember all too well from the not-so-distant past.
To sum up, the general picture looks like this. The fall will bring a seasonal depreciation of the hryvnia, as a result of which the hryvnia should not go down any further than about UAH 28.00/USD. The Government might get one more tranche from the IMF or portfolio capital will begin to come to Ukraine in greater volumes, including for the purchase of newly-issued government eurobonds. These factors will extend the period of relative equilibrium in the FOREX market for a few more months, but they will not eliminate the problem of financing for the next year or two.
What happens next is a good question. The only thing we can be certain of is that FOREX risks will grow and the hryvnia rate will fluctuate more sharply, whether it goes up or down. However, this is only next year. For now, Ukrainians can sleep peacefully..