In Ukraine, record the dollar has fallen. What’s next?

На Украине рекордно обвалился доллар. Что будет дальше?

© the press service of the NBUUkrainian hryvnia continues to strengthen against the dollar, on a daily basis since early December, setting four records. The strengthening is due primarily to the currency coming hot on the efforts of the NBU and Ministry of Finance debt market. However, in the coming days, the trend in the decline of the dollar can izmenitsya the beginning of December the dollar has dropped 35 cents since the beginning of the year — 4 hryvnia. The current exchange rate of the National Bank of Ukraine is of 23.69 hryvnia to the dollar (63,34 ruble), while a year ago the dollar was given 27,82 of the hryvnia.

The invasion of speculators

Experts agree that the first and main reason to strengthen the hryvnia — selling large volumes of bonds of internal state loan (government bonds), for which non-residents sell foreign currencies to buy local and to buy securities.

The Bank deliberately kept clearly too high discount rate. From mid-2018 to August 2019 it amounted to 17-18%, more than twice exceeding the level of inflation. Despite the fact that in any of the neighboring countries, or the refinancing rate by 1-2 percentage points below inflation (Poland, Hungary, Romania) or the same amount above (Russia).
The Ministry of Finance in the government bonds denominated in local currency, focused on these cosmic rates of the NBU. In December 2018 — February 2019 the Ministry has repeatedly exceeded the NBU discount rate by 1-2 percentage points, placing t-bills at 19-20%. By the way, essentially the situation has not changed and after a gradual reduction of interest rates to 15.5%, it is still significantly higher than in neighboring countries.

“In the first half in the Ukrainian market of government bonds formed the opportunity to earn excess profits. Those who started the currency in the beginning of the year and sold at the rate of 27.7 UAH./$, then by purchasing government bonds, say, under 19% per annum by mid-summer had a net income of more than 13-13,5% in foreign currency.

That is more than 26-27% per annum due to high rate of borrowing and the gradual strengthening of the hryvnia. To buy dollar in the summer was on of 26.15 UAH./ Of course, no one financial market in the world there is not only such a rate of return on financial investments, but even less than half.

However, the NBU decided in the summer to encourage the inflow of new money in the speculative market, which has turned the market of Ukrainian government bonds. 13 Jun 2019 national Bank adopted a regulation that allowed banks short-term Finance in local currency legal entities-non-residents to acquire government bonds.

It was about lending and operations on forward/swap for a period not exceeding 14 working days. Plus purchased government bonds are allowed to keep in the international Depository Clearstream that deprived Ukraine of the possibility to determine who is the ultimate owner of the bonds.

After these changes the currency poured into the Ukrainian financial market falls. That was also promoted by the promises of the new government to open the land market”, — says Director of the Department of economic policy of the Federation of employers of Ukraine Sergii salivon.
According to data of the National Bank of Ukraine at the beginning of December, the volume of investments of nonresidents in government bonds reached 106.1 billion ($4.5 billion). The volume of investments of nonresidents in government securities compared to the beginning of the year rose by 99.7 billion ($4.22 billion), or almost 17 times.

The share of non-market government bonds increased to 13%, while at the beginning of the year, the figure was less than 1%.

Taking over the debts of “Naftogaz”

In addition, this year the “Naftogaz of Ukraine” has entered the international borrowing market and borrow money, instead of buying dollar in the domestic market.

In July 2019, “Naftogaz” has placed three-year Eurobonds for $335 million and five-year Eurobonds for 600 million euros. The yield on dollar-denominated issue amounted to 7,375%, the yield of the issue in euros 7,125%. A major buyer of the Euro tranche was made by the EBRD (acquired fifth part). The company then said that the funds it required for the accumulation for the winter, the increased volume of gas in storage to be ready to the probable termination of Gazprom’s transit from 1 January 2020 and strengthen its position in negotiations with the Russian gas monopoly.

In November, Naftogaz has completed the main phase of 7-year Eurobonds for $500 million under 7,625%. Funds will be used for General corporate purposes, including repayment of more expensive debt made earlier.

Thus, “Naftogaz” has got into debt and has not created the demand for the Ukrainian currency market, which is also reflected in the strengthening of the hryvnia.

The new President and the hope for peace

The third reason to strengthen the hryvnia, according to experts, is the growing confidence in Ukraine by foreign investors. The new President, his peace plan, the upgrade of the Parliament — all this gave the opportunity to foreigners more optimistic view on Ukraine.

If President Poroshenko’s initial forecast of the inflow of foreign investment in the country this year did not exceed $1.5 billion, in fact ending the year at $3 billion.
According to the State statistics service, the volume of foreign direct investment in Ukraine equity capital on October 1, 2019 amounted to $34,73 billion, or $1.82 billion, or 5.5%, exceeded the figure at the beginning of the year. In the first quarter of 2019 FDI to Ukraine increased by $45.5 million

A record harvest and the workers

Concomitant positive for the hryvnia factors have become traditional for Ukraine, high yield, good faith and remittances from the growing number of migrant workers.

This year Ukraine broke the record grain harvest. As of December 10, grains and legumes have been threshed on 15.2 million hectares, from which collected 75.2 million tons. In 2018 in Ukraine gathered 70,06 million tons of grain and leguminous crops, and before that for five years the harvest was around 60-66 million tons.

According to the NBU, the volume of remittances of Ukrainian “guest workers” in the first half of 2019 amounted to $5.54 billion compared to the first half of last year the volume increased by $254 million In the Ministry of economy expects that the volume of money transfers to Ukraine from Russia and Ukraine this year could reach $12 billion.

The dollar will go up

However, economists believe that excessive strengthening of the hryvnia is not very good for the Ukrainian economy because it is export-oriented. In such a situation suffer from exporters, increase imports, and thus increasing the trade imbalance. Therefore, we need measures that will produce a correction of the exchange rate.
One such measure is the reduction in the discount rate of the National Bank of Ukraine. In addition, the national Bank should be more active to redeem currency on the domestic market to boost demand.

“The trend in the strengthening of the hryvnia will change in the coming days. The sharp depreciation of the hryvnia is not expected, the national Bank will try to somehow reverse the trend”, — said in an interview with informed source.

And economist Alexei Kusch, “if at the next meeting of the NBU significantly (by more than 1.5%) will not reduce interest rates, foreign lobbying financial speculators will become obvious even to the blind”.Fedor Quiet

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