Ukrainians rushed to buy dollars on Thursday, driving the hryvnia currency to a seven-week low on speculation that officials will allow a sharp depreciation after elections on Sunday.
Though there were no visible queues at exchange points and
banks as there were four years ago when the hryvnia plunged by
38 percent, bankers said they saw increased demand from ordinary
Ukrainians trying to protect their savings.
The hryvnia, which has been loosely pegged to the dollar
since early 2010, weakened to 8.1790 per dollar on Thursday
morning after closing at 8.1590 on Wednesday.
State-run Oshchadny Bank then quickly entered the market
with bids that brought the rate up to 8.1680 per dollar. Later
on Thursday, Ukraine’s central bank offered to sell dollars at
8.05 hryvnias per dollar.
Analysts say the hryvnia is over-valued, as evidenced by
Ukraine’s widening trade and current account deficits, and there
are widespread expectations that officials will back off efforts
to prop up the currency after the elections are over.
Earlier this week, in an interview with Reuters, Prime
Minister Mykola Azarov defended policy on the hryvnia.
“There are no threats to the hryvnia’s stability,” he said,
adding that despite falling steel export revenues Ukraine had
many other sources of foreign currency.
“This allows us to both maintain currency reserves at the
necessary level and support a firm national currency while
fulfilling our debt obligations and making for payments for
(Russian) gas,” he said.
PRESSURED RESERVES
Most financial sector players are far less convinced.
Brokerage Renaissance Capital said in a note this week the
hryvnia was trading 15-20 percent above the value which would
have brought Ukraine’s current account gap to a sustainable
level and removed the pressure on central bank reserves.
“This suggests that the equilibrium value of the hryvnia is
about 9.2-9.6 hryvnias per dollar,” it said.
Ordinary Ukrainians, as is the case across the former Soviet
bloc where confidence in local currencies is traditionally weak,
have been increasing foreign currency purchases since September,
when the hryvnia briefly slipped to a 33-month low after a
liquidity injection by the central bank.
“Ordinary people are panicking and emptying banks’ (foreign
currency) cash reserves for fears of devaluation,” said a trader
at a large local bank.
Local companies are trying to keep as much of their cash as
possible in foreign currency. Analysts say exporters are
withholding their revenues while importers are making advance
payments in foreign currency which they can cancel later.
The government has never openly said it intends to allow the
hryvnia to depreciate. But the central bank spent $2.5 billion
on interventions in the first seven months of this year and
analysts say it would struggle to maintain that sort of support
for the currency in the future.
“If the central bank sticks to the stable hryvnia pledge its
reserves will fall by another $2.0-2.5 billion in October,” said
another local bank trader.
NO GREAT LEAP
Little has come of hopes Ukraine would revitalise its
communist-era infrastructure and move away from an oligarchical
economic model since an Orange Revolution in 2004 which shook up
its political elite.
Foreign investors say its bureaucracy remains opaque and
difficult to deal with and the economy and public finances have
lurched from one crisis to another since the global financial
turmoil of 2008.
Among other things, the International Monetary Fund, with
which Ukraine hopes to reach a new loan agreement soon, has
recommended Kiev allow more exchange rate flexibility.
Ukraine’s economy, dominated by steel exports, appears to
have shrunk year-on-year in the third quarter as growth slowed
to an estimated 1 percent January-September from 2.5 percent in
the first six months of the year.
The government, however, hopes the full-year figure will
remain positive and growth will rebound next year thanks to
domestic demand boosted by pre-election wage and pension
increases.
