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17.10.2018

UKRAINIAN FINANCIAL MARKET FLUCTUATION IS GROWING

PhD. BARDAS’ V.,
Investment and forecasting expert

Devaluation of the local currency taking place against the background of expectation of strengthening in the US monetary policy, when for countries that do not have resource-based economies and depend on the exported dollars, the macroeconomic risks of reduction in resource materials conjuncture and increase in the cost of debt refinancing grow.

That’s why speculative investors who have invested funds into Ukrainian debts having received up to 17% per-annum started withdrawing capital from Ukraine. Also against the background of increase in prices of energy sources (gas and petroleum), as well as with the view of high energy consumption of Ukrainian enterprises the deficit of the balance of payment this year has doubled under the results of half a year which creates additional demand for currency. Simultaneously the decrease in the scope of direct foreign investment caused the shortfall in the inflow of currency under the financial account by 30%.

With regard to hryvnia liquidity, the NBU ensures its stable expansion at the account of the absence of crediting of the real economy when the commercial banks simply invest in the government debts and National Bank securities under 14-15% per annum. Starting from June of the current year we are recording gradual growth of hryvnia turnover in the economy of Ukraine (Fig. 1).

Fig. 1. Dynamics of cash amount outside banks and deposits on demand (in the amount aggregate M1) within the period from July 2017 till July 2018*
* European Analytical Centre.

This, in particular, increase in the scope of interbank crediting by 27% in July compared to June, increase of cash in turnover and amount of deposits on demand to 80 billion UAH in June compared with June 2017, as well as decrease of the balance under the deposit certificates in July by 10 billion UAH (Fig. 2).

As consequence, free hryvnia appears in the economy and population and businesses rush to convert it to foreign currency at the profitable exchange rate. Simultaneously the pace of growth in the export of goods and services slowed down to 11% per annum which has cut the supply of dollar at the currency exchange market.

Fig. 2. The dynamics of the exchange rate of US Dollar in Ukraine and portfolio of deposit certificates in turnover*
* European Analytical Centre.

Within the following five months it is expected that the scopes of export of agricultural products will stabilize with view to decrease in collection of cereals, continuation of the import growth in Ukraine (beginning of the heating season and of purchase energy sources) and also insignificant increase in the export of metal products that will provide some support to hryvnia.

Besides, the government will further increase the amount of borrowings and raise rates under the foreign currency and hryvnia bonds. That’s why further to the smothering devaluation in September and in IV quarter of the current year to 29-30 UAH for a dollar is the most probable scenario.

In general the amount of cash in the economy and deposits on demand from the beginning of the year has increased by 12%. Additional risks of the international trade will slow down the growth of export of goods and services to 10% per annum, as well as increase debt risks for developing markets. And thus, receipts under the financial account may fall down. Under the influence of the above factors the exchange rate of dollar in Ukraine may grow up to 30 UAH and in 2019 – to 33 UAH. And that under the condition if the current government repays the international obligations in a timely manner and avoids another default.

Devaluation of hryvnia will lead to decrease in purchasing power of the national currency that as on today is at the minimum level already and amounts to 3 kopecks from the nomination in 1996 (Fig. 3). First of all the decrease in the exchange rate of hryvnia will affect the prices on food products and fuel. After them the industrial and imported goods will grow more expensive: household appliances, goods for home and garden, construction and others consumable materials.

Fig. 3. Dynamics in purchasing power of one hryvnia 1996 through 2018 *
* European Analytical Centre

 

Gradually depreciation of hryvnia due to the increase of the cash mass in turnover creates the basis for galloping inflation in Ukraine that may reach 15% per annum. Within the next 1-2 months due to the high import dependence of the national economy the current growth of the US dollar exchange rate by 6% will lead to growth of the average level of prices by 3-4% thereat the food products may jump up in price by 2% due to the increasing costs of transportation and energy resources.

Thus, the imported energy resources in Ukraine cover over 80% of the domestic market. That’s why this commodity category by 90% correlates with the dynamics of the currency exchange rate and its expected growth is 4%. With regard to the cost of utility services, the government already is ready to increase the cost of the natural gas by 30% because it is tied to the global prices. The growth of gas prices will cause the growth of prices on electricity and other utilities.

Besides, traditionally in the pre-election period in Ukraine the default risks increase that may have a negative effect on opportunities of the current government and banking systems with regard to implementation of obligations undertaken: payments under the currency domestic debt bonds and fixed-term deposits. That’s why the safest option for preservation of funds is creation of financial assets in foreign currency.

As on today Ukraine has reached a certain progress in negotiations with IMF in particular on adoption of a draft law on the Anti-Corruption Court. That’s why the main issue for releasing another loan from IMF to Ukraine is increase in the cost of gas for population. This problem is in the economic plane of the population’s and businesses’ ability to ensure the growth of revenues of the government funds with the simultaneous increase in the cost of energy resources. It is absolutely possible that the current government will find a compromise with the IMF by way of a gradual increase of the cost of gas for population and increase of tax burden on the economy.

Therefore, the dynamics of the currency exchange rate and the index of consumer prices increase the risks of volatility for the national financial market that will lead to an increase in the percentage rates in the economy and deceleration of economic growth.

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