The hryvnia’s devaluation continues as panic keeps spreading across the financial markets. On Feb. 25, the interbank foreign exchange market’s trade session closed with the hryvnia reaching 9.68-9.78 against the dollar, bringing it close to the 2008 record low valuce of Hr 10 per dollar.
The euro moved to the price of Hr 13.31-13.45.
On Nov. 21, when the political crisis started, the hryvnia
exchange rate was at 8.22 to the dollar and 11.07 to the euro. Ukraine’s
currency has lost almost 20 percent of value since then.
The high risk of the country’s default and significant
inflationary expectations are prompting private and corporate clients to
transfer their money in foreign currency, thus increasing demand for dollars
and euros.
Another key reason for the hryvnia weakening is a
substantial current account deficit. In 2013, it was around 9 percent of gross
domestic product – highest deficit in the region. This figure reflects an
excess of Ukrainian imports over exports, which contributes to even larger
demand for foreign currency.
The
optimal range for the Ukrainian economy from the standpoint of external price
competiveness and bank risks is Hr
9.5-10.0 to the dollar, according to Kyiv-based investment
bank Dragon Capital Feb. 25 research note.
The bank foresees that the hryvnia might slump below
Hr 10 to the dollar. “However,
taking into account associated banking system risks, we think the National Bank will try to avoid this scenario,” said Dragon
Capital.
The National Bank of Ukraine under the government of
Viktor Yanukovych and Mykola Azarov was pursuing a tight monetary policy, not
allowing the hryvnia to escape a strict price corridor.
To stop devaluation, the central bank intervened in
the interbank market, offering dollars at the prices lower than the market
ones. This led to a decrease of regulator’s foreign reserves to a critically
low level of $15 billion so far, according to Timothy Ash of Standard Bank.
However, the Verkhovna Rada appointed Batkivshchyna
parliamentary faction member and former Kredobank chief executive officer
Stepan Kubiv as new central bank governor on Feb. 24. “Not sure he wants to waste scarce foreign exchange reserves defending the hryvnia at the moment,” added Ash.
Besides, the price for the Russian gas may go back
from $268.5 to $400 per 1,000 cubic meters because the new political leadership
in Ukraine disappoints Russia’s government. This will increase Ukraine’s needs
of dollars ending up with even greater hryvnia devaluation.
Receiving the bailout package is another critical
issue for nation’s financial condition. Without such a package country will not
be able to fulfill own debts denominated in foreign currency by the end of the
year, analysts emphasize. And with hryvnia devaluation serving foreign debts
gets even more expensive.
Ukrainian Finance Ministry on Feb. 24 released a
statement estimating country’s needs to receive financial help within next two
weeks with its overall figure reaching $35 billion for Ukraine to be able to
serve own obligations in 2014 and 2015.
While Russia is likely to freeze further tranches
within the $15 billion package agreed by Yanukovych and Russian President
Vladimir Putin on Dec. 17, the International Monetary Fund and the European
Union are seen as two main alternative sources able to provide the desired
amount of financial help.
IMF and European Commission top officials have already
declared own preparedness and ability to provide the bailout.
However, the IMF has certain policy requirements for
Ukraine to implement in order to receive the financing. The country has to keep
a flexible exchange rate, increase gas tariffs for the households and cut
government subsidies.
The first step to meet one of these requirements was made by the
National Bank on Feb. 7 when it introduced new exchange rate for the hryvnia at 8.7. However, the regulator
introduced additional limitations on currency trading which the IMF will
probably oppose.
The IMF can’t come soon enough for Kubiv, because help from the European Central Bank is doubtful.
Oleksandr Valchyshen, head of the analytical
department at Investment Capital Ukraine, says everything depends on the new
government. “It will be the momentum that could calm down Ukrainian financial
markets and foreign currency market in particular. If it doesn’t happen, the
pressure will continue” for more devaluation, Valchyshen said.
Kyiv Post
staff writer Anastasia Forina can be reached at [email protected]. Kyiv Post associate business editor Ivan Verstyuk can be reached at
[email protected].
