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 on Nov. 20 – 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 – such as mandatory conversion of 50 percent of export earnings from hard currencies to hryvnia and full conversion of wire transfers from abroad of more than Hr 150,000 ($18,000).
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. The law was retracted on Nov. 20 for further refinement.
The National Bank of Ukraine, however, announced it will push for an adjusted version of the law – 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), claimed the bill aims to fight speculation and stabilize the hryvnia. Experts, however, argue it would encourage black market exchanges. In a preemptive strike, the National Bank has announced that those who engage in this practice will face prosecution.
The law was to come into force two months after publication. In a note to investors, Kyiv-based investment bank Dragon Capital said the steps are meant to encourage citizens to sell dollars now (rather than buy them) by making future sales unprofitable unless the hryvnia drops, for example, 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.
“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 slide 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 short term depositor recently turned down an offer of a 90 percent annual rate on 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 as other protective measures are bieng 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 will make conversion into hryvnia mandatory for any sum above Hr 150,000 wired from abroad starting Nov. 27.
Meanwhile, Ukrainian mattresses continue to hold some $50 billion, according to the NBU. 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 probably too high, but added that with Ukrainians changing $13-16 billion of cash annually, the revenues generated by a 15 percent tax on exchanges 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 NBU’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 placed 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 risk expectations.
Nonetheless, 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]
