The hryvnia on the interbank market has crossed the threshold of UAH 14/USD

Fortune turned against the hryvnia

Photo: Konstantin Melnitskiy

Yesterday, in the course of trading on the interbank foreign exchange the exchange rate of the hryvnia crossed a new psychological barrier of UAH 14/US $1. Based on data provided by InterBusinessConsulting, trading closed at UAH 13.95 – 14.30 /USD, though the majority of transactions were carried out at the rate of UAH 14.00 – 14.10/USD. As a result, the national currency sunk in value by UAH 0.5 within a day. In turn, the National Bank of Ukraine set the official rate at 13.65 UAH/USD, thus updating its historical high for the third time over the last seven days.

Restrain the pressure

Yesterday the national currency continued to slide, even despite the fact that at the end of last week the NBU introduced the rule of 100% mandatory sale of foreign currency for all of its recipients. Last Friday, NBU Governor Valeriya Hontareva once again stated that the balanced level of the hryvnia exchange rate was within the range of UAH 11.5 – 12.0/USD. “This is the level at which the fundamental analysis shows the state of the Ukrainian economy,” said Hontareva.

Nonetheless, the reality is considerably different from the forecast due to the military operations on the territory of the country and the economic downturn. Hontareva says the current exchange rate on the market is nothing more than panic, which shapes demand on cash and non-cash markets. Hontareva also says that since August 5 the NBU has made more than six interventions in currency sales along with other administrative measures, including new regulations for the sale of foreign currency earnings. At the same time, the NBU will monitor dishonest transactions and operations.

“Exporters will not be able to circumvent the mandatory sale. This will be considered a violation of foreign exchange control. All bypass mechanisms introduced by commercial banks will be strictly suppressed,” assured the NBU governor. She added that holding of foreign exchange earnings and the use of invalid export-import contracts or purchase of currency for non-existent securities will be penalized. Hontareva says the restrictions were introduced for three months with the expectation that the hostilities in the east of Ukraine will end over this period.

Thus, from the beginning of the year the hryvnia exchange rate on the interbank market has dropped by 69.23% from UAH 8.27/US $1.

Withdraw at any cost

Experts previously interviewed by Capital said that the major reason for devaluation was the increased demand for foreign currency among the population and active buying of the U.S. dollar by the NBU with the aim of replenishing its reserves. Now, according to President of the Ukrainian Analytical Center Oleksandr Okhrymenko, the main pressure on the exchange rate is from commercial banks forced to buy foreign currency to repay deposit liabilities to their clients. “The banks are also short of hryvnia. But the problem is that there is a line-up of people demanding the return of their foreign currency deposits. But the banks have no currency, so they are forced to buy it at any rate,” says Okhrymenko.

Based on the data of the NBU, in July individuals’ bank deposits in U.S. dollar terms decreased by US $468.1 mn, in June – by US $772 mn. In this regard some of the interviewed experts see the key to stabilization of the currency situation in more stringent administrative measures on the part of both the NBU and the government. In particular, as Managing Partner at Capital Times Erik Nayman noted it would make sense to prohibit early termination of deposit agreements, at least for the period of the ATO. This possibility has been previously mentioned by Hontareva.

For stabilization of the exchange rate, according to the head of the Analytical Subdivision at Investment Capital Ukraine (ICU) Oleksandr Valchyshyn in the coming days and weeks it is necessary to conduct additional capitalization of banks at the expense of existing or other more adventurous shareholders. Therefore, the stress test under the assumptions of a prolonged recession and severe devaluation should be completed. “At the same time assumptions may come true, but such a tough stress test is necessary to create strong airbags in the banks, so that they can survive. It is also necessary to minimize involvement of the government in the process of recapitalization,” says Valchyshyn. The expert believes that until the process is complete, the NBU should announce a moratorium on the merger of other Ukrainian financial institutions for Ukrainian banks and their ultimate beneficiaries.

However, it is important that international financial institutions such as the EBRD and the IFC start issuing bonds in hryvnia. In addition, Valchyshyn believes that the NBU and the government should focus their attention and rhetoric on inflation and seek to reduce it with market methods even now. “The government must show that it controls inflation. On the part of the Cabinet its work should aimed at balancing public finances (national budget + Pension fund + state companies). This should also reasonably reduce costs,” said the interlocutor. “In order to form the revenue side of the budget pressure on small and medium sized business should be reduced. They must be allowed to operate freely”.