The stability of the Ukrainian hryvnia is touted by the ruling Party of Regions as one of their main accomplishments. Now, however, the grinding political crisis is threatening the value of the currency. People are becoming panicky. And, in Ukraine, that means people are buying dollars.
The hryvnia exchange rate reached 8.9 per dollar on the interbank forex market today. The euro overcame the Hr 12 threshold, offered for Hr 12.03.
The National Bank of Ukraine, implementing its tight monetary policy line, decided to intervene in the market, immediately offering dollars for Hr 8.6. The most recent intervention before today happened on Jan. 30, when the regulator offered U.S. currency for Hr 8.4.
On Jan. 28, the amount of currency traded on the Ukrainian interbank market broke a record, going up to $5.1 billion, with the volume of dollar trade reaching $4.7 billion.
Negotiations over forming a new Cabinet of Ministers, following last week’s resignation of Prime Minister Mykola Azarov, are contributing to the instability. So are the vague prospects of receiving a package of financial help from Russia, which has suspended a $15 billion bailout after one $3 billion tranche, pending the formation of a new government.
However, Oleksiy Leshchenko, vice president with the Gorshenin Institute think tank, said that the hryvnia will likely strengthen after a newly formed government comes to power.
The government’s foreign currency liabilities become more expensive as the hryvnia falls. This year, the government has to pay back $8.1 billion of debt denominated in foreign currency, excluding Ukrainian oil and gas monopoly Naftogaz’s $2.7 liabilities to Gazprom, the Russian gas provider.
The $8.1 billion total includes $3.6 billion payment to the International Monetary Fund, $1.6 billion on Naftogaz bonds, $1 billion on government Eurobonds and $1.9 billion on government internal bonds in foreign currency.
On Jan. 31, Moody’s international rating agency downgraded Ukraine’s sovereign rating to Caa1 with a negative outlook. Several days earlier, another agency – Standard & Poor’s – also downgraded country’s foreign-currency credit ratings to CCC+/C, or vulnerable, with a negative forecast. Both mentioned political risks as main reason for assessing country’s financial state being close to default – government’s ability to fulfill its financial obligations is under serious question.
However, Timothy Ash, Standard Bank analyst, sees the hryvnia’s devaluation as essential for Ukraine’s exporters, who have long been waiting for weaker currency. “The hryvnia needs to be weaker, and it is now moving. I sense what we are seeing is the authorities are now trying to manage the currency weaker. This is being helped by the fact that a) Prime Minister Mykola Azarov has gone – he had been an ardent supporter of the fixed exchange rate; b) with other emerging market currencies weakening aggressively, including important trade partners (Russia and Turkey), this makes the need for a weaker currency obvious and also provides something of a cover for a backdoor currency correction. They are trying to achieve this without causing a run on the currency – so far January only saw a 0.7 per cent drop in bank deposits, i.e. modest given the scale of the political crisis unfolding,” Ash said.
Volodymyr Sidenko, the Razumkov Center analyst, recommends to diversify personal savings while the hryvnia is weakening. Gorshenin Institute’s Leshchenko advises to purchase more imported goods before they become pricier and also to invest in real estate.
Both of them refused to predict where the falling hryvnia will land.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected]
