The National Bank of Ukraine said there are “no fundamental reasons” for the hryvnia’s recent decline, from roughly 24 to the dollar to close to 25 on Oct. 3. I hate it when central banks come out with this kind of defense. It is a market. There are buyers and sellers. Currencies go where they go.
Ukraine has a current account deficit, the basic balance is still negative, and its recent appreciation has been driven by a weight of hot money inflows, and amid concern around the stalled International Monetary Fund lending program, some of those are now leaving. So the currency weakens, that is fundamental.
It’s good that the NBU is smoothing the outflows, which will help reassure portfolio investors over the longer-term. So they can still manage this, and they are incredibly capable. I have total faith in them on this one – that is unless we see more cock-ups on the PrivatBank and rule of law front by their political masters in the presidency.
But, given the growth story, the hryvnia appreciation had probably gone a bit too far. It’s better for the hryvnia to be a bit weaker. The NBU’s ability to defend the hryvnia is not unlimited, so they want to take the froth off the depreciation but would not want to stand in the way of the trend. I think it is important to get a resolution in terms of the PrivatBank issue and hence the relationship with the IMF. That is out of the NBU hands at this point in time, in the courts and the presidency.
Let’s not beat around the bush. The hryvnia is weakening because of concerns around PrivatBank, which cost the taxpayers $5.5 billion allegedly because of bank fraud, the role of former co-owner, billionaire Ihor Kolomoisky, and what all this means for the relationship with the IMF. Investors are nervous. So far President Volodymyr Zelensky and Prime Minister Oleksiy Honcharuk have fallen well short in terms of their re-assurance.
Now are concerns over PrivatBank, Kolomoisky and the relationship with the IMF “fundamental” reasons? I tend to think they are. This is pretty fundamental in my mind to the Ukraine story. It needs sorting or I think we will see more portfolio outflows, more pressure on the hryvnia, loss of reserves, and less scope for the NBU to cut policy rates to stimulate the economy and get growth going. The NBU might have to hike policy rates, if this all is not resolved.
Zelensky and Honcharuk need to wake up to the risks posed by the PrivatVank issue to macroeconomic financial stability.
Just to recap, never has a Ukrainian leader had such a wonderful opportunity to bring positive transformational change to Ukraine. If he cocks up, he will have to bear that cross for a very long time. Unforgivable, in my mind, if he cannot get all this, and understand that he needs to put proper distance between himself and all oligarchs. He cannot have “favorite” or “Special K” oligarchs.
