Crowds outside of banks, being ushered in by police officers two at a time, are never a good sign. But that’s what the Kyiv Post saw in front of state-owned Oschadbank – a sign that worries of the hyrvnia’s expected devaluation are not getting any better.
Fearing that tattered nerves could lead to
2009-style collapse, Ukraine’s monetary authorities have turned on the capital
controls – setting up mandatory conversion of 50 percent of export earnings
from hard currencies to hryvnia.
On Nov. 16, parliament registered a law that
would take a whopping 15 percent commission on the sale of foreign currency with
revenues going to Ukraine’s pension fund. It marks the latest move by Ukraine’s
authorities to boost revenue and pull the economy out of the untaxed shadows.
The law’s author, head of the parliamentary committee on finance,
banking, tax and customs policy Vitaliy Khomutinyk (of the pro-presidential Party
of Regions), told business daily Kommersant that “the main purpose of the bill
is to combat currency speculation and stabilize the hryvnia.”
Parliament is
scheduled to consider the bill today, he added, but the law would only come
into force two months after publication – no earlier than February. According
to a research note by Kyiv-based investment bank Dragon Capital, this is meant
to encourage citizens to sell dollars now (rather than buy them) by making
future sales unprofitable unless the hryvnia drops to 9.65 per dollar, 15
percent above the current 8.2.
The investment
bank currently forecasts a smooth transition to 8.4 hyrvnias per dollar by the
end of the year, and 8.8 by the end of 2013, but noted a disorderly scenario
could put the rate at 10 to 1.
The bill has several exemptions, notably for
transfers of less than Hr 150,000 from abroad and withdrawals from foreign
currency deposits of not less than one-month maturity. Coupons from government
bonds, including the recently issued $500 retail bonds, will also be exempt.
“All these policies are definitely meant to assist the authorities to
weather the shock of the economy, characterized by the high interest rates on
the hryvnia assets,” said Alexander Valchyshen, head of research of investment
bank ICU. “They are trying to soften the pressures on the currency.”
Fears of a rapid currency slid have weighed
heavy on the economy for months, putting a hold on investments and driving
rates sky high. According to Philippe Joannier, chairman of the board at
Ukrsibbank, the situation has gone so far that a corporate depositor recently
turned down an offer of a 90 percent annual rate because a competitor offered
higher.
The banker said he understood the central bank’s
rationale, which resembles actions taken by European monetary authorities in
the 1980s, when currency controls were widespread. The measures respond to
current needs, Joannier said, in which “a 15-20 percent devaluation is more than enough for
the economy, but the big danger is psychological.”
“This is why
the central bank is trying to slow down (the falling rate) by all means
necessary,” he said.
Indeed, the move comes days after other
protective measures were implemented. The first is the mandatory sale of half
of exporters’ foreign currency earnings, which took effect on Nov. 19, with
maximum term for the repatriation of profits reduced from 180 to 90 days. The
second makes conversion into hryvnia mandatory for any sum above Hr 150,000
wired from abroad.
Meanwhile, Ukrainian mattresses continue to
hold billions of dollars – some $80 billion as of mid-2012, according to
official figures. One reason is Ukraine’s giant shadow economy, a problem the
authorities hope will be solved by making under-the-table payments in dollars
more costly.
Dragon Capital analysts noted this figure is
too high, but added that with Ukrainians changing $13-16 billion of cash
annually, the revenues generated by the law could account for 7.5-10 percent of
the pension fund’s expected 2012 income, and could protect $5-8 billion of the
central bank’s reserves.
Meanwhile, the National Bank of Ukraine’s
foreign currency reserves fell to $26.8 billion in October, down 15 percent
since the beginning of the year.
On a positive note, Ukraine place a $1.25
billion 10-year eurobond on Nov. 19 at 7.8 percent – the lowest rate this year.
The country benefitted from falling yields for emerging markets and reduced
political risks’ expectations.
Nonetheless, the recent measures taken by the
authorities reflect a gloomy outlook, one reason why the move towards a
flexible rate has not yet come, Valchyshen said. “It shows expectations are very
dire,” he said. “It means they expect recession, and quite a sizable one.”
Kyiv Post editor Jakub Parusinski can be
reached at [email protected]
