Focus has uncovered the hidden mechanisms behind the November devaluation and what the dollar's price could be by the end of the year.
Following the parliamentary elections, the Ukrainian national currency plummeted once again – as of November 12, the official hryvnia-dollar exchange rate fell to 15,75 UAH/USD (down 2,80 UAH/USD, or 18%, since October 31). The psychological barrier of 16 UAH/USD was breached on the interbank foreign exchange market. This means the hryvnia has already lost almost half its value compared to last year. As Focus has discovered, if exchange rates do not stabilize at the current level, the National Bank may decide to impose new administrative restrictions.
Why was the devaluation launched?
Before the November surge, the official hryvnia-dollar exchange rate hovered around 12,95 UAH/USD for about a month. The price of this exchange rate stability was a decline in the NBU's gold and foreign exchange reserves to $12,59 billion (down $3,8 billion). A significant portion of this amount was spent on interventions to strengthen the hryvnia. "Considering that by the end of the year, after all gas payments, the NBU's reserves should remain below $9 billion, further maintaining the exchange rate using reserves is becoming impossible. Therefore, the hryvnia had to be devalued," comments Dmytro Boyarchuk, Executive Director of CASE-Ukraine.
There's also a political undercurrent to the current exchange rate situation. "In Ukraine, any economic change is traditionally associated with the government's actions. Therefore, the decision was made to maintain the hryvnia exchange rate before the parliamentary elections, which triggered the development of a black market for foreign exchange," comments Oleksandr Zholud, an economist at the International Center for Prospective Studies (ICPS). When the hryvnia was released, its exchange rate began to approach the shadow market level. According to Focus's source, this sparked panic and led to a further weakening of the national currency.
Yuriy Tovstenko, head of local debt instruments at Concorde Capital, cites pent-up demand for dollars from businesses and exporters' reluctance to bring foreign currency into the country due to fears of further devaluation, among other factors putting pressure on the hryvnia. One of Focus's anonymous sources estimates the current unmet demand for foreign currency at $1 billion.
Speculative and emotional factors also continue to influence the hryvnia exchange rate. "With the easing of administrative restrictions, healthy market speculation is underway—market participants are taking risks and betting on the exchange rate to rise or fall. Those holding foreign currency are now betting on the rise," suggests Dmitry Krepak, Chairman of the Board of PJSC Kredobank.
On the other hand, the extremely low level of trust in the national currency is making itself felt. "Everyone who has spare hryvnia is using it to buy foreign currency, and this process has reached epidemic proportions," notes Vasyl Nevmerzhytskyi, advisor to the Chairman of the Board of Eurobank. Focus's source attributes this widespread desire to abandon the hryvnia to a psychological reaction to the war in Donbas and the economic problems within the country.
How the NBU conducts auctions
While the Central Election Commission continued counting votes, the National Bank announced changes to its exchange rate policy. Starting November 5, the regulator introduced daily auctions, the results of which will determine the equilibrium (indicative) exchange rate of the hryvnia. The NBU decided to abandon auctions to support bank cash registers. According to Nikita Mishakov, chief expert of the Foreign Exchange and Money Markets Department at OTP Bank, this method is aimed at a gradual devaluation of the hryvnia and bringing its exchange rate in line with market realities.
The volume of bids processed during the new auctions is approximately $5 million per day. Compared to current daily interbank turnover (approximately $200-300 million), this amount is negligible. Therefore, according to Ruslan Kravchenko, Head of Trading and Treasury Operations at UniCreditBank, such auctions cannot significantly impact the foreign exchange market and are primarily held to determine the indicative rate. According to bankers interviewed by Focus, their clients only managed to guess the rate and purchase small amounts at such auctions a few times. Most bids were rejected. After all, according to the rules established by the NBU, only bids that differ from the equilibrium rate by no more than 1% are processed.
How much do people buy cash dollars for?
The dollar also rose at exchange offices. Banks were instructed to adhere to the indicative rate, deviating from it by no more than 5% (as of November 12 – UAH 0,78). For example, following the auction held on November 12, the equilibrium (indicative) rate was UAH 15,73/USD, while the average market weighted rate at bank cash desks was UAH 15,43/16,17/USD (buy/sell).
Despite the fact that the cash dollar exchange rate has broken above 12,95 UAH/USD and has risen by an average of 50 kopecks daily since November 5, buying foreign currency at bank tellers remains problematic. Meanwhile, illegal money changers are constantly inundated with customers. The gap between the black market rate and the cash bank rate still persists. While banks averaged 14,88/15,67 UAH/USD (buy/sell) on November 11, money changers were buying dollars at 16 UAH and selling at 16,50 UAH. The next day, the dollar jumped to 17 UAH among the black market operators.
"While the market had previously experienced a serious currency shortage, after the official devaluation began, the deficit became total. In a growing market, the supply of foreign currency cash disappeared, both from banks and black market operators. Quotes for small amounts of cash currency significantly outpace the NBU's indicative rates," comments Nikita Mishakov.
What will happen to the hryvnia by the end of the year?
The hryvnia's future still looks uncertain. Dmytro Boyarchuk links the potential dynamics of the national currency's exchange rate not to import and export flows, as usual, but to the amount of available hryvnia, which will inevitably be used to purchase foreign currency. "The exchange rate will be determined by the scale of emission. Since we have a large budget deficit, and there are currently no other sources of financing besides printing the hryvnia, the situation looks very serious. The NBU should have tied up liquidity long ago, even at the expense of the budget," the Focus source reasons.
Some financiers are anonymously voicing far from encouraging forecasts: "Many in the market are already emotionally 'ripe' for a 20 UAH/USD exchange rate, and it's highly likely that it will remain at that level on the cash market by the end of the year. Citizens should also prepare for a significant increase in gasoline and imported goods prices, and, as a result, a decline in living standards." On the other hand, banking circles aren't ruling out the possibility that the NBU will prevent such a scenario from materializing and will tighten the screws even further. "The regulator has announced a transition to a free exchange rate, but the National Bank is not prepared for a deep devaluation," a bank employee, again on condition of anonymity, told Focus. "Attempts are currently underway to stabilize the hryvnia in the 15-16 UAH/USD range. If the exchange rate continues to rise, significant changes to foreign exchange regulations could follow, including partial restrictions on import transactions."
Not all Focus interviewees are so pessimistic. Alexander Zholud, for example, hopes that in a few weeks, when the panic subsides, the exchange rate will return to around 14 UAH/USD. Dmytro Krepak believes that, barring any extraordinary events, the dollar will not rise above 16 UAH/USD by the end of the month. Vasyl Nevmerzhytskyi, for his part, expects the hryvnia to stabilize at no more than 17 UAH/USD. He believes that if the exchange rate can be maintained at least within these limits by the end of the year, the hryvnia could begin to strengthen in early 2015.
Maria Babenko, Фокус
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