Money likes silence, says the proverb. The political instability that has enveloped Ukraine since Nov. 21 when the government rejected a far-reaching political and trade deal with the European Union has fostered the public’s hunger for U.S. dollars. Now in its third month, the anti-government rallies have spread from Kyiv to the streets of major cities, and with it, the U.S. dollar went from trading at 8.21 on Nov. 21 to above 8.6 as of Jan. 30.
The interbank forex market closed on Jan. 30 with the dollar
trading at 8.62-8.64 to the hryvnia. The highest the dollar reached in 2013 was
Hr 8.26. Ukraine’s central bank has been willing to keep the hryvnia from devaluating,
and started intervening on the interbank market by offering Hr 8.4 per dollar. This
led to an all-time record for the Ukrainian interbank market: on Jan. 28, banks
bought $4.73 billion to quench their thirst for dollars.
Ukraine’s acting Prime Minister Sergiy Arbuzov said the
central bank has the situation under control and said it has provided the forex
market with enough foreign currency to maintain liquidity. But this monetary
policy has been the object of heavy criticism from a number of influential
financial organizations, including the International Monetary Fund.
“Devaluation of the hryvnia was mainly
caused by political instability,” Volodymyr Ovcharenko, analyst for Kinto asset
management company, told the Kyiv Post. Moreover, according to the analyst, destabilization
of national currencies has recently occurred in other countries that have external
trade deficits, like Ukraine, and which are going through political turbulence.
He cited Turkey as an example,
and forecasted that the hryvnia will devalue to 8.7-8.8 which should have a
positive impact on the economy.
The central bank could stop the
hryvnia’s devaluation, but minor volatility within the 8.3-8.4 range is quite
possible, said Razumkov Center’s economic programs director Vasyl Yurchyshyn. The
economic impact of ongoing devaluation should not be notable, he added.
Moody’s, a global credit
worthiness rating agency, foresees the hryvnia devaluing to 8.5 per U.S. dollar
in 2014, while its rival – Standard & Poor’s – forecasted exchange rate
stability at 8.2 hryvnias per dollar. But the latter figure was calculated
before the social and political crisis started to escalate in Kyiv.
Moreover, S&P downgraded Ukraine’s foreign-currency credit
ratings to CCC+/C, or vulnerable, with a negative forecast due to the political
crisis. This means, borrowing for Ukraine will become pricier, while the central
bank requires additional financial resources to keep the national currency’s
rate stronger than what market forces are dictating.
Nevertheless, the Ukrainian Exchange reacted
optimistically to the hryvnia’s devaluation. Its UX Index has been sinking substantially
after clashes between the police and protesters put the country in its biggest
crisis since independence. Given that exporters’ revenue grows when the local
currency devalues, their shares on the Ukrainian Exchange went up, bringing the
whole index with them.
Investors in addition see a positive signal in the resignation
of Mykola Azarov, Ukraine’s Prime Minister since 2010. Moreover, Russian President
Vladimir Putin recently promised that his country would keep buying Ukrainian
bonds as part of a $15 billion financial assistance package for the nation’s
struggling economy. The country’s default risk, however, depends enormously on
expectations of Russia stopping the deal. Deutsche Bank assesses the
probability of Ukraine’s default as 10.3 percent, while credit default swaps (CDS)
on the country’s debt reached 866 basis points on Jan. 29 – only Argentina’s
and Venezuela’s CDS spreads are larger.
