The Ukrainian hryvnia was ranked as the best performing currency in the world year-to-date, according to Bloomberg Terminal on May 7.
Olena Bilan, chief economist at Kyiv’s Dragon Capital investment firm, revealed the news over Facebook. It caught many off guard because of the currency’s negative reputation after its value plunged following the EuroMaidan Revolution and the start of Russia’s war against Ukraine.
In February 2014, when the National Bank of Ukraine released the hryvnia from its peg to the U.S. dollar amid growing political instability in the country, the currency lost 70 percent of its value. It has never recovered, and few living in Ukraine today would consider the hryvnia a strong currency.
But according to economists, there’s nothing contradictory about this. The hryvnia has indeed strengthened more than other currencies this year. But that is not necessarily a sign of growing macroeconomic stabilization or an entirely desirable development.
Instead, the hryvnia is appreciating for local and seasonal reasons.
No need to rejoice
Unsurprisingly, the two key factors in the hryvnia’s growth are: the country is an agricultural powerhouse and a major importer of energy.
During the fall, Ukraine actively imports energy resources as the country prepares for winter, and farmers also need fuels to harvest their crops. As the end of the year nears, the government usually plans its largest expenses and makes payouts from the state budget. As a result, the value of the hryvnia falls sharply in December, Illya Neskhodovsky, an economist with the Reanimation Package of Reforms, told the Kyiv Post.
“At the start of the year, the situation goes in reverse,” he says. “Why? Because the farmers get revenues, and that influences the market.”
There are also other factors. Bilan notes that remittances from Ukraine’s labor migrants abroad have buttressed the hryvnia, and the country’s limited exposure to external financial markets has allowed it to withstand investors’ recent jitters about emerging markets.
But this is not necessarily good news.
“The hryvnia’s strong performance should not be taken for granted” because the currency remains highly dependent on commodity prices such as steel, grains, and oil and gas, Bilan said in a message to the Kyiv Post. “Global commodity prices were supportive to Ukraine so far this year, but a recent spike in global oil prices (if sustained) will worsen Ukraine’s external position.”
Or, as Neskhodovsky said: “There’s no need to rejoice, because the situation can change significantly in the second half of this year.”
Oleksandr Paraschiy, an analyst at Concorde Capital, doubts that the hryvnia can grow much stronger. That’s because further strengthening will harm Ukraine’s trade balance, which, in turn, will weaken the currency.
“In economics, everything is balanced,” he says.
The problem is that true appreciation of the hryvnia requires a strong foundation: demand for hryvnias from non-residents. That demand can only come from two souces: a sharp increase in exports, which will be sold for dollars, or significant improvement in the investment climate, which will bring dollars into the country.
Some good news
While the hryvnia’s appreciation may not herald macroeconomic growth, there are a few positives. One of the factors that has supported the currency is foreign purchases of government bonds, which peaked at $550 million in early April. Two-thirds of these bonds were purchased this year, Bilan said. And last year the government successfully sold $3 billion worth of Eurobonds.
Additionally, the hryvnia’s steady, seasonal depreciation and appreciation for four years in a row is good news.
“For any currency, predictability is desirable,” Paraschiy says. Provided that the hryvnia continues to follow this trend, it has achieved this.
But ensuring the currency’s continued health will require decisive action from the government, such as fulfilling its obligations to the International Monetary Fund – creating an anti-corruption court and raising gas prices to market levels – in order to receive its next $1.9 billion tranche of IMF financing. Without that money, Kyiv will not be able to raise the money it needs from credit markets and other official creditors to repay external debts.
“The government faces $6.7 billion of external debt repayments by the end of 2019, while its end-March (foreign exchange) leftovers, estimated at $1.4 billion, will be enough only through August,” Bilan said.
Back in December, Tomas Fiala, president of the European Business Association and head of Dragon Capital, predicted that the currency will plunge at least to Hr 30 per dollar if Ukraine’s government doesn’t follow through with the IMF lending program, which was frozen in April of last year. Ukraine has received only $8.4 billion of the $17.5 billion program, which ends in 2018.
The authorities should also improve the business climate in the country to attract more investment, according to Paraschiy.
Current foreign direct investment levels are “catastrophically low” and not enough to stimulate economic development, he said.
