Alexander Valchyshen: Policy makers should take hands off approach and let the hryvnia float.
Speaking in New York City at an investment summit, an adviser to Prime Minister Yulia Tymoshenko known more as an Orange revolutionary than an economist may have overstepped common sense. Vladislav Kaskiv, the aide, made an eyebrow-raising and likely baseless prediction about the fate of Ukraine’s currency.
Kaskiv, recently appointed as a Tymoshenko adviser on foreign investment, said on Dec. 9: “The hryvnia may devalue after presidential elections right after the arrival of the new president into office.”
His comments were made at the high-profile summit on Ukraine organized jointly by the Financial Times newspaper and the Foundation for Effective Governance, a policy think tank funded by Ukraine’s richest citizen, Rinat Akhmetov. In a nutshell, not only does Kaskiv’s opinion appear unfounded, it also falls short of the proclaimed goal of the summit’s organizers. They pledged the event would combine “up-to-date information with cutting-edge analysis.”
Unfortunately, Kaskiv has never been known to comment on domestic monetary policy affairs, let alone predict the hryvnia’s exchange-rate movements. His post as adviser to Tymoshenko on foreign investment may have fooled attendees of the conference into thinking this “high-profile official” was a key government economic policymaker.
In fact, his true responsibilities in government office are less noble and he would be well-advised in the future to stop commenting on topics in which he is not well-versed. After all, his background is one of a leading organizer of the public protests during the 2004 Orange Revolution, not that of a currency expert.
Kaskiv’s affirmation on the future path of exchange-rate policy could just be a sporadic thought, voiced out loud, which is customary for Ukrainian politicians. They often rush to make controversial statements for political gain, regardless of fact or merit.
In fact, Tymoshenko made completely opposite predictions about the hryvnia’s fate on Dec. 14, saying: “If all election battles settle down normally, the hryvnia will be returned to the level of Hr 6-6.5 relative to the U.S. dollar.”
Both of the predications on the future path of Ukraine’s exchange rate movements ill-serve the public and the entire economy.
Why is Kaskiv’s opinion unfounded?
Firstly, nearly one half of state debt is denominated in hard currency. Hence, another wave of devaluation would make debt-servicing payments greater than now.
Secondly, this would hammer down – nearly to the ground – the remaining healthy part of the banking sector, which has barely survived 60 percent devaluation in the last year. Scarce bank lending would become scarcer still, rendering the economy nearly unworkable.
Thirdly, it is true that devaluation has thus far helped balance Ukraine’s economy, narrowing the current account and trade deficits by providing a boost to exporters while also curtailing imports. But further devaluation could plunge Ukraine back into recession and further dent state budget revenues. This would further widen the fiscal deficit and worsen the creditworthiness of the government.
If the government further deteriorates its creditworthiness, then there would be no lenders to lend a hand. In fact, Ukraine’s currency is already one of the weakest globally. Furthermore, the currency still remains in deeply devalued territory. Hence, there are no fundamental factors to push the currency into another devaluation spiral.
And what about Tymoshenko’s prediction of a stronger hrvynia? It is also flawed. It is another populist promise made on the eve of presidential elections and, luckily, the market has treated it as such.
What would happen if a President Tymoshenko delivered on such a promise next year? Foreign investors with short-term investment positions, those ones who play the so-called carry-trade game on the global capital markets, would step up activity right on the eve of elections, betting on Tymoshenko’s win in the elections. They would capitalize on currency appreciation and environment for high interest rates. Then they would soon change their bets and seek a return. This could unsettle the local market and cause a new wave of devaluation, hitting a still fragile economy hard.
Looking ahead, if the central bank stays independent from the wishes of Ukraine’s cash-starved government, any weakness in the currency could be viewed as a strong opportunity to buy up local assets cheaply. True, there is a risk that the government will try to highjack the central bank’s power. But at this political juncture, lawmakers – heavily influenced by big business interests that spar with each other – are unlikely to allow this.
Apart from political ambitions, there are various business interests at play. Exporters would benefit from devaluation, while appreciation could help banks and importers.
But in the final analysis, officials should learn from the lessons of the not-so-distant past, where artificial currency pegs played a big role in creating vast macroeconomic imbalances. Had the currency floated in recent years, Ukraine’s current account and trade balance would never have mushroomed to the levels seen in 2008. The sharp and sudden currency devaluation that came in late 2008 helped to correct these imbalances, though painfully by virtue of its abruptness.
Policymakers would better serve the public and economy by taking a hands-off approach on the currency and letting it float. They should allow the central bank to quietly do its job in managing the flow of the currency, preventing it and the economy from big external shocks.
Alexander Valchyshen is head of research at Investment Capital Ukraine in Kyiv and a member of the executive committee of the Ukrainian Society of Financial Analysts. He can be reached at [email protected].
