Valeria Gontareva
What to Expect from the Foreign Exchange Market in the Near Future? Hints from the National Bank
"We wanted a mirror, but we got a crooked mirror," Valeria Gontareva says sadly, explaining to journalists the National Bank's decision to let the hryvnia float freely.
Since October of last year, the National Bank has regulated the official interbank exchange rate through daily auctions, where it sells $3 million. "We received up to 100 bids from banks per day," explains Gontareva. "The rate you saw (indicative – Hubs) was determined solely on the basis of these bids."
The head of the NBU insists that this tool worked initially, but then bankers broke it. They began submitting bids with non-market rates. "As long as the difference between the actual and indicative rates was insignificant, it could be tolerated," says Gontareva. "But when it rose to 20-30%, auctions lost their role." The low official interbank rate benefited banks with large foreign currency loans. When the rate rises, they are forced to build up additional reserves.
Since December, the NBU, the IMF, and banks have been discussing abandoning the indicative rate. Even then, the interbank market was operating in a gray area. The ValKli trade confirmation system was recording rates close to the indicative rate, but in reality, they were trading at a different rate, 3-4 hryvnias higher. "As a result, we ended up with multiple exchange rates, which isn't what the NBU was aiming for," Gontareva shrugged. "That's why we're leaving the market so that there's a single, unified rate."
On Monday, the head of the NBU warned top managers of the top 40 banks about her intention to depreciate the hryvnia exchange rate starting February 5. The bankers received no detailed explanations about how the market would operate. Therefore, they all closely followed the country's top banker's press conference today. Interbank trading was sluggish until the end of her speech.
Now what?
"Starting today, we're stopping auctions, as they've become pointless. We're also ceasing to set the indicative rate," says Gontareva.
The NBU is completely withdrawing from the interbank market. It will retain its interventions with Naftogaz Ukrainy. In January, the National Bank directly sold $500 million to Naftogaz Ukrainy.
The formula for calculating the official exchange rate remains unchanged: it will reflect what is happening on the interbank market. The "official" and "gray" interbank rates should be equalized. Bank exchange offices will set market rates. Given the 2% Pension Fund levy and the 3,000 hryvnia purchase limit, the black market will continue to operate. The NBU's position is: the Pension Fund levy should be abolished, and the 1107 non-bank exchange offices that were driving the exchange rate should be closed.
Since midday today, we've been watching the official and unofficial rates on the interbank market converge. So far, they haven't met. Trading at the official rate ended at 21,66 UAH/USD. The unofficial interbank rate moved further. "The market closed at 24,80/25,20. Sales, as in previous days, were spotty, with demand coming from large non-residents," says the treasurer of a major bank. "There was no panic in the market; exactly what was supposed to happen happened."
Gontareva declined to offer any exchange rate forecasts. She said only that she and the IMF hadn't considered or calculated a 25 UAH/USD exchange rate. The gray market closed today 20 kopecks higher.
Press conference of Valeria Gontareva
Manna from the IMF
The National Bank's international reserves fell by $1,1 billion in January to $6,42 billion. Gontareva offers reassurance: the NBU and the Deposit Guarantee Fund have agreed on a program and are awaiting IMF assistance. The Fund's mission is currently working with the Ministry of Finance and the Ministry of Energy. "We expect their decision in two to three weeks," Gontareva says. The IMF has agreed to increase the NBU's international reserves. With these reserves, the regulator will be able to continue to conduct direct interventions for Ukraine's largest importer, Naftogaz.
When asked by journalists, "Will we make it?", Gontareva responded optimistically: "What do you mean, 'we'll make it'?! We're very optimistic about the future. The positive news we expect from the IMF soon could impact the dollar exchange rate—we could see it go down."
It's unlikely anyone will be able to predict the dollar exchange rate in three weeks. Today at 2:00 PM, the National Bank of Ukraine (NBU) lowered the official hryvnia exchange rate from 16,73/$1 to almost 18/$1. Bank exchange offices have not yet changed their rates. PrivatBank lowered the rate several times during the day: from 23,2 to 25 hryvnia. On the black market, the dollar can be bought for 23-24 hryvnia. "Tomorrow, the interbank market will be at 24-26/$1," predicts the treasurer of a major bank. For now, he sees no reason for the hryvnia to strengthen: there's no supply of dollars. The population still wants to buy dollars, and exporters aren't planning to use their hidden earnings. Plus, there's pent-up demand for foreign currency from importers.
Gontareva estimates deferred demand from importers at approximately $1 billion. However, not all of them are willing to buy foreign currency at the current market rate. The NBU surveyed importers and responded that they can currently only place orders for $300-400 million.
Advice and consideration
The second most important news from the NBU was an increase in the key rate (the interest rate at which the NBU lends to commercial banks) from 14% to 19,5%. The main reason was increased inflation risks. The NBU intends to maintain its inflation forecast for this year at around 17,2%.
The regulator claims that the rate hike will have minimal impact on the real economy. Banks are already lending weakly, and they have 30 billion hryvnias in their correspondent account with the NBU, which they could use for lending, but are not doing so due to the risks.
Today, Gontareva was in good spirits. As usual, she was joking. She recalled the unexpected winter snow, her unsuccessful attempt to buy $200 at the Sberbank of Russia currency exchange office, and talked about the crowd of security guards with dogs who were stationed at the NBU under Sergei Arbuzov. Unlike the deputies, the journalists listened attentively and then peppered her with questions on the topic. Toward the end of the meeting, the press service announced that they would distribute the key points of the meeting to the journalists. A playful murmur went through the journalists: "Temniki!" No. Just the key points, which, incidentally, were not included in this text.
"Get used to the fact that there will be market volatility!" Gontareva quickly left with these words. Today, the NBU board is making important decisions regarding the fate of major Ukrainian banks.
Lesya Voytitskaya, HUBs
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