There’s a lot of panic in Ukraine now, and not only the prospect of a Russian military invasion. Everyone who buys anything (which is all of us) are alarmed at increasing prices and the decreasing value of the hryvnia, Ukraine’s battered national currency.
The turmoil in the country has pushed the hryvnia to all-time lows, spurring people to buy dollars and euros.
The hryvnia has dropped around 50 percent since the start of the year, before improving slightly to 11.3 against the dollar on April 17.
Ukraine’s financial solvency depends on receiving help from international creditors.
The International Monetary Fund is considering providing a $18 billion package, short of the $27 billion that Ukraine’s government thinks it needs over the next two years.
On April 14, the European Union approved a mid-term loan of $1.38 billion and an additional $848 million in micro-financial aid for Ukraine. The same day the United States agreed to provide a $1 billion loan guarantee. Meanwhile, the World Bank is going to transfer $750 million in May.
Moreover, the National Bank of Ukraine has raised its key interest rate – from 6.5 percent to 9.5 percent in a bid to strengthen the hrvynia. Besides, regulator has banned 14 commercial banks from interbank foreign exchange market for their speculations.
Government’s official forecast for the average rate of the hryvnia in 2013 is 10.5 to the dollar, while inflation expectations are at 12-14 percent. That is already happening, from the price of bus tickets to prices in groceries, pharmacies and restaurants.
People’s hryvnia wages and savings are simply worth less.
Local exporters, of course, are among the categories of people who benefit from the hryvnia’s devaluation. They get revenue in stronger foreign currency. For instance, for the metallurgy giant Metinvest, a 10 percent national currency devaluation leads to a $250-$300 million increase in earnings, according to company’s chief financial officer Oleksiy Kutepov.
What experts say
Timothy Ash, head of emerging markets research at Standard Bank in London
Ash is cautious. “Russian intervention could also complicate IMF financing – would the IMF want to still lend if there is open civil war?” he asked Ash does not see the hryvnia going back to the government’s forecast of 10.5, even if the situation in the east eases and the IMF money comes, although currency will strengthen.
Valeria Gontaryova, board chairman of Kyiv-based Investment Capital Ukraine
Gontaryova. interviewed by Hubs business website, told that the hryvnia will strengthen to 9.8-10.7 against the dollar after the political and economic situation in the country stabilizes. She foresees a massive sale of foreign currency as soon as the hryvnia stabilizes..
Vitaliy Kravchuk, analyst for Institute for Economic Research and Policy Consulting in Kyiv
The hryvnia will not sink lower than 15 against dollar before getting the IMF loan. It will not devalue much from its current rate even if situation in the eastern regions worsens, because the central bank will use administrative measures to keep the national currency from tumbling further. The hryvnia will be at 11-12 by the end of the year if there is no war with Russia and Ukraine receives financial help from foreign creditors. The rate needs to be at 13 or lower to balance the current account. Ukrainian banks will face serious problems of the hryvnia falls below 14, although even a rate below 11-12 destabilizes the financial situation significantly.
Oleksandr Parashchiy, leading analyst for Kyiv-based Concorde Capital investment house
He does not think the hryvnia will devalue further before the government receives a bailout package from the IMF. However, if tension in the east escalates and real war between Ukraine and Russia breaks out, the hryvnia may collapse. A rate of 11.5-12 will allow Ukraine to have a break-even current account, while the local banking system may not continuously handle the rate after the threshold of Hr 13 for one dollar and can simply collapse, according to him. Moreover, if hryvnia sinks below 14 and stays there, government will not be able to pay off debt denominated in foreign currency.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
